Bill Loomis (firstname.lastname@example.org) is a managing director at Stifel Nicolaus. 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, go to the research page at www.stifel.com.
Wall Street is again focused on earnings season, which will be underway when this column appears. Last quarter, results from federal information technology firms generally beat investor expectations.
The consolidation trend is alive and well in the federal information technology industry. General Dynamics Corp.'s agreement to acquire Veridian Corp. for $35 per share in cash, or $1.5 billion including debt, certainly got the attention of industry, as well as investors.
Overall first quarter results were strong for most publicly traded federal IT companies, as they met or beat investor expectations and maintained or raised their earnings guidance.
As we enter first-quarter earnings announcement season, it appears to be another difficult quarter for commercial information technology service firms, yet a good quarter for federal IT service firms.
<FONT SIZE=2>Federal IT stocks have been weak over the past couple months for a number of reasons, including uncertainty from civilian budget delays and potential reallocation of funds because of the possible conflict with Iraq. Some investors are also saying that growth may have gotten "as good as it could get." As an example, they point out that defense spending growth in fiscal 2004 is currently proposed at about 4 percent, compared to double-digit increases the two previous years. </FONT>
<FONT SIZE=2>It has been a wild ride for the </FONT><FONT SIZE=2>publicly traded federal information technology services companies. In one day alone, following lowered expectations by PEC Solutions Inc., the federal IT companies were down 10 percent as a group. </FONT>
<FONT SIZE=2>Many investors will be asking two key questions as they review fourth quarter 2002 earnings reports and management earnings guidance for 2003: Is there any sign of a rebound in commercial information technology spending, and will federal continue to show good growth?</FONT>
<FONT SIZE=2>In a bit of a switch, commercial information technology stocks have outperformed federal IT stocks over the past couple months. Is this the rotation out of federal stocks and into commercial that many federal IT investors have been fearing as commercial business picks up? </FONT>
Investors in the federal and<FONT SIZE=2> commercial information technology space have watched Electronic Data Systems Corp. go from high flying to struggling. One issue EDS is tackling is the eight-year, $6.9 billion Navy-Marine Corps Intranet contract awarded in October 2000. </FONT>
As we near the end of the third<font SIZE="2"> quarter, it appears there will be moregood news from federal information technology services firms and not-so-good news fromcommercial IT service firms. </font>