MARKET WATCH: Fed IT companies end second quarter on a high note

Bill Loomis

Public federal IT service companies have reported solid second-quarter results and generally have had upbeat outlooks. Investors noticed and drove federal stocks up by 12 percent this year.

The stocks outperformed the overall market's 2 percent increase, as measured by the S&P 500, and the commercial IT service companies, which are down 13 percent.

Growth is slowing, however. The overall internal revenue growth for the public companies was 13.8 percent in the second quarter, down from 15.7 percent the previous quarter.

Anteon International Inc. reported second quarter earnings per share of 53 cents, up 36 percent from the same period last year and ahead of investor expectations of 47 cents.

The company had strong contract wins in the quarter (new orders up 10 percent year-over-year) and 17 percent organic revenue growth. It also raised its earnings guidance for the year.

Computer Sciences Corp. improved its federal government business. Total federal revenue rose 5 percent, representing 34 percent of the company's total sales.

CSC's business with civilian agencies was down 7 percent primarily because the FBI Trilogy and NASA Prisms contracts ended last year. But its defense business was up 9 percent, and CSC expects its federal business growth rate to be in the upper single digits for the year.

Dynamics Research Corp. reported operating earnings per share of 23 cents, a penny below investor expectations.

Citing award delays and slower than expected ramp-up on recent contract wins, DRC lowered its full-year earnings guidance modestly. DRC had no organic growth in the quarter, but indicated its bid pipeline is more than twice the level of a year ago.

ManTech International Corp. continues its recovery, reporting second quarter earnings per share of 35 cents, up from a loss last year and a penny above expectations.

The company showed a strong 16 percent organic revenue growth and had good contract wins in the quarter, but left its earnings per share guidance for the year unchanged.

MTC Technologies Inc. reported earnings per share of 32 cents, up 18 percent and within the company's guidance range. Organic revenue growth in the quarter was 11 percent.

The combination of delays on its Flexible Acquisition and Sustainment Tool contract and weak performance of recently acquired companies led MTC to lower its earnings per share guidance from a range of $1.42 to $1.56 to a range of $1.32 to $1.42.

Perot Systems Corp.'s federal business was down 2 percent as a result of the loss last year of an Immigration and Naturalization Service contract.

But the company is upbeat on its federal business, based on recent wins and its business pipeline. It believes it can return to double-digit growth by year's end.

SI International Inc. reported earnings per share of 35 cents, up 17 percent and ahead of expectations of 31 cents, with solid organic revenue growth of 15 percent. SI also raised its earnings guidance for the year.

SRA International Inc. reported earnings per share of 28 cents, up 27 percent and a penny better than investor expectations. Organic revenue growth was a strong 30 percent, and contract wins were better than expected though the company left its earnings guidance unchanged.

I expect the positive trends we saw in the second quarter to continue for the rest of the year, with a likely uptick in contract award activity.

Bill Loomis is a managing director of the Technology Research Group at Legg Mason Wood Walker Inc. He can be reached at wrloomis@leggmason.com. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation or needs of individual investors. For additional information and current disclosures for the companies discussed herein, please write to: Legg Mason Wood Walker, Inc., 100 Light St., P.O. Box 1476, Baltimore, MD 21203, Attn: Research Department.








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