Market Share: Federal IT companies can expect solid growth this year

Billl Loomis

Federal IT services stocks have been up following the past month's fourth quarter earnings reports. Quarterly results and the near-term outlook were not exciting for investors, but contract awards seem to be picking up. Most of the public federal IT service companies are expecting accelerated growth in revenue and earnings per share.

Among that group, SI International Inc. had the strongest results for the quarter, with earnings per share of 43 cents, ahead of investor expectations of 41 cents and up 39 percent year-over-year. This happy surprise for investors came even after management revised earnings guidance higher in mid-December. SI reported the highest organic revenue growth in the industry during the quarter, up 33 percent.

SRA International Inc. continues to report impressive growth, with EPS of 31 cents, 2 cents ahead of investors' estimates and up 19 percent over a year ago. Organic revenue growth was a solid 25 percent, and the company gave EPS guidance in line with investor expectations.

Anteon International Corp. reported EPS of 56 cents for the quarter, up 24 percent adjusted for merger costs, and a penny ahead of estimates. Organic revenue growth for Anteon was about 10 percent in the quarter. With its acquisition by General Dynamics Corp. expected to close next quarter, the company did not issue any earnings guidance.

The other public federal IT service companies had single-digit organic revenue growth, though each company expects improvement in coming quarters as contract awards and funding increase. ManTech International Corp. reported fourth quarter EPS of 47 cents, but included a gain from a joint venture sale and one-time accounting items. Adjusting for these items, EPS was 2 cents ahead of investor estimates and up 27 percent year-over-year. ManTech had organic revenue growth of about 4 percent in the quarter. It gave guidance for 2007 EPS that was well ahead of investor expectations.

CACI International Inc. reported EPS of 72 cents, up 7 percent but 2 cents higher than investor expectations. Organic revenue growth was also 7 percent in the quarter. However, the company did give guidance below analyst estimates, citing delays on new contract startups and awards. Subsequent to the earnings announcement, CACI has won several new contracts, including snagging one of seven winning slots on the $19 billion Army Strategic Services Sourcing contract.

NCI Information Systems Inc. reported EPS of 11 cents, 2 cents ahead of expectations. NCI expects to see task orders ramp up under recent wins, particularly the Army Total Engineering and Integration Services II contract. Dynamics Research Corp. reported EPS in line with investor expectations, up 4 percent on ?4 percent organic revenue growth. The company also gave guidance generally in line with investor estimates.

As we head into the second half of the fiscal year, investors increasingly will focus on how the fiscal 2008 budgets will shake out, keeping an eagle eye on defense budgets, given the stronger than expected fiscal 2007 defense budget request. Also, most people I talk to seem optimistic that in this election year, Congress will quickly pass the fiscal 2007 budget. That will help keep the momentum of contract awards and funding in the year.

Bill Loomis is a managing director at Stifel Nicolaus, which acquired Legg Mason's Capital Markets Group in December 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.

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