Bill Loomis | Large contracts offer boost

Market Share | Financial views of a competitive environment

Bill Loomis

Despite the difficult business environment for many federal information technology and professional services companies, stocks of publicly traded companies have fared well so far this year.

Federal IT companies are largely unaffected by the issues facing the broader stock market and economy recently, such as higher mortgage and loan defaults, tightening credit and slower consumer spending.

During the past month, companies in the industry have reported second-quarter 2007 results and issued future earnings guidance largely in line with investor expectations. As a result, stocks of the public federal IT and professional services companies have increased 12 percent so far this year, outperforming the S&P 500 index, which is a 3 percent increase. However, aerospace and defense companies' stocks are the star performers again this year, up 27 percent. The current ? and proposed fiscal 2008 ? defense budgets continue to favor the aerospace and defense companies with double-digit growth on equipment and war-related spending, but defense IT spending remains sluggish.

CACI International Inc. and SRA International Inc., which have reported weak financial results during the past year, reported their June quarter generally in line with investor expectations. Their fiscal 2008 revenue and earnings guidance also were in line with expectations. CACI is projecting as much as 12 percent earnings per share (EPS) growth in fiscal 2008, ending June 30, 2008, and SRA is projecting an EPS growth range of 4 percent to 10 percent for the same period. This does not include the impact of the recent Constella Group LLC acquisition, which could add at least a few cents to the EPS.

The fastest-growing public federal IT services companies last quarter were NCI Information Systems Inc., Stanley Inc., and ManTech International Corp. NCI had strong growth in the quarter, with its EPS jumping 47 percent year-over-year.

Revenues at NCI climbed 39 percent ? 34 percent growth excluding recent acquisitions ? as the company ramped up existing contracts and recent task-order wins under its large indefinite-delivery, indefinite-quantity contracts, including the Air Force Network-Centric Solutions, Army Information Technology Enterprise Solutions and Total Engineering and Integration Services, and the Veterans Affairs Department's Global Information Technology Support Services.

Stanley had EPS growth of 48 percent year-over-year on 44 percent revenue growth ? 34 percent growth excluding recent acquisitions. Stanley had 60 percent growth in its passport services contracts as it helps the State Department handle the jump in passport applications this year. The company had strong growth in its Army business and a boost from a Navy task order to install communication and data systems on Marine Corps Mine Resistant Ambush Protected vehicles.

ManTech had EPS growth of 13 percent year-over-year on 21 percent revenue growth ? 11 percent excluding recent acquisitions. ManTech benefited from growth in its Army contracts including its Regional Logistics Support contract and its Countermine Support contracts.

ICF International Inc. had the strongest growth by far in the quarter. However, most of the growth was driven by a state contract. ICF is the prime contractor on the $756 million Louisiana Road Home contract to support the state's post-Hurricane Katrina home-rebuilding effort, and it represented 68 percent of the company's total revenues in second quarter 2007. ICF reported EPS of 75 cents versus 7 cents a year ago on 239 percent growth in revenues.

The next key event that could influence federal IT stocks' performance will be the progress Congress makes on the fiscal 2008 spending bills. Most companies and investors I speak with are expecting some budget delays this year, but any delays exceeding a couple of months, particularly on the defense bills, could have a negative effect on earnings and, therefore, stock prices.

Bill Loomis is a managing director at Stifel Nicolaus. 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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