Federal budgets create fertile field of IT opportunities

Bill Loomis

After reviewing the fiscal 2007 budget request, as well as fiscal 2006 enacted budgets, and the strong pace of defense spending, the outlook for federal IT services firms is favorable. While the 0.3 percent increase in requested, over 2006 enacted, defense IT spending is disappointing, particularly relative to the overall defense budget growth of 6.9 percent, the 2007 enacted budget likely will be higher than requested, much as it was for fiscal 2005.

Much of the federal IT service firms' contract funding comes from outside the defense IT budget. Significant spending comes from the defense operations and maintenance budget, which is up 6.8 percent billion over the 2006 enacted O&M budget to $152.3.

Federal IT service stocks will likely benefit from a strong pickup in federal contract awards in the next couple of quarters, following late passage of 2006 budgets, and resulting in accelerating organic revenue growth and earnings per share through the year.

In December, President Bush signed the defense bill, the last of the 2006 budgets Congress passed, but final 2006 IT spending amounts were not disclosed until release of the 2007 budget request. The 2006 enacted IT budget was $62.5 billion, up 0.6 percent over 2005 actual spending.

The civilian 2006 enacted budget ? $32.1 billion, well below the president's request of $35 billion ? was a result of a drop in 2006 civilian IT spending. At $30.4 billion, the enacted 2006 defense IT budget is up 1.3 percent over the $30 billion request. Defense spending for 2005 was revised up by $3 billion, to $31.2 billion.

The 2.8 percent growth in the overall 2007 request for IT ? to $64.3 billion ? from the 2006 enacted IT budget of $62.5 billion is about what was expected.

The request for civilian IT spending is up by 5.1 percent, and the defense IT request is up by 0.3 percent over the enacted 2006 IT budget, which is a bit disappointing. But significant revenue for defense IT companies comes from outside the defense IT budget, through work supporting various defense operations such as program offices and engineering operations. Overall requested defense spending is up a strong 6.9 percent in fiscal 2007 to $439 billion.

The Defense Department has not yet provided details of its 2007 IT request, but the civilian agency budgets were detailed, included underlying programs. The Homeland Security Department was the big budget winner, with its 2007 IT spending request up 21.2 percent to $4.4 billion over the 2006 enacted IT budget of $3.6 billion.

There are a number of new DHS contract opportunities coming up, including the $45 billion Eagle contract, the $2 billion Secure Border Initiative and the $500 million TEAMS II.

We still have a long way to go before the final 2007 budgets are approved by Congress, but I believe they are favorable for federal IT service providers so far. Now we just need contract award activity from 2006 budget programs to pick up.

Bill Loomis is a managing director at Stifel Nicolaus, which acquired Legg Mason's Capital Markets Group in December of 2005. He can be reached at wrloomis@stifel.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: Stifel Nicolaus, 100 Light St., Baltimore, MD 21202, Attn: Research Department.

About the Author

Bill Loomis is a managing director at Stifel Nicolaus.

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