Bill Loomis | Climbing the Top 100 list: A few recipes for success

Market Share | Financial views of a competitive environment

"Moving up the chart without acquisitions will be difficult during the next year." Bill Loomis

Washington Technology's 2007 Top 100 list highlights how broad the federal professional services market has become. Engineering services firms such as KBR Inc. and Fluor Corp. rank in the top 10 along with Lockheed Martin Corp. and other traditional firms.

About half of KBR's revenues support the Middle East deployment under the Army Logistics Civilian Augmentation Program (Logcap) III, a contract KBR won five years ago. The follow-on indefinite-delivery, indefinite-quantity contract, Logcap IV, is expected to be awarded this year to at least three companies, with all of KBR's task orders to be competed again.

CACI International Inc. is on the team of IAP Worldwide Services Inc., a company competing for one of the Logcap IV awards. The company has highlighted this potential contract in meetings with investors as an opportunity to expand its logistics-related support business.

As an indicator of the federal market's appeal, companies with United Kingdom-based parents are growing and seeking additional U.S. acquisitions that will likely move them up the list.

A private-equity firm also is moving up the chart through the acquisition route.

Veritas Capital Management LLC still owns a majority stake in DynCorp, which had its initial public offering in May 2006. Veritas has been busy acquiring federal services firms during the past couple of years ? its latest is Vangent Inc., formerly Pearson Government Solutions. We likely will see Veritas move further up the chart next year because two of its companies formed a joint venture (DynCorp and McNeil Technologies Inc.) and won a $4.6 billion Army contract from the Intelligence and Security Command. The companies will provide translation and interpretation services in support of Operation Iraqi Freedom. The contract award is currently being protested by the prior incumbent, L-3 Communications Corp.

With the federal information technology market under increasing budget pressure, we likely will see companies broadening their addressable markets beyond just IT services, primarily through acquisitions. SRA International Inc. is one company I expect to aggressively broaden its services during the next few years, largely through acquisitions. With no debt and solid cash flow, SRA could spend $700 million or more on acquisitions without expanding its equity base.

Moving up the chart without acquisitions will be difficult during the next year. Most companies have seen their growth slow as funding for IT and nonwarfighting programs are partially diverted to fund the war in the Middle East.

Lockheed Martin announced that organic growth in its IT unit dropped 0 percent to 1 percent in the last quarter below the company's goal of double-digit growth for the year. Northrop Grumman had solid 12 percent growth in its IT unit this past quarter, but that was largely driven by three newly awarded state contracts.

Northrop Grumman's intelligence services business also showed strong growth, while its federal IT civilian agency business declined. General Dynamics Corp. improved its organic growth in its IT unit to a still sluggish 2.9 percent last quarter, noting that in North America only, growth was 6.7 percent.

Although growth in the fiscal 2008 IT budgets should be better than fiscal 2007, the longer it takes Congress and the president to agree on the $124 billion spring defense supplemental spending bill, the more pressure will be put on IT spending in the near term.

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 here, please write to: Stifel Nicolaus, 100 Light St., Baltimore, Md.

About the Author

Bill Loomis is a managing director at Stifel Nicolaus.

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