Bill Loomis

COMMENTARY

Last quarter critical for successful 2011

But will a frenzy of contract activity carry over to next year?

Bill Loomis is a managing director at Stifel Nicolaus.

Despite the daily talk of budget cuts and other headwinds for government contractors, the shares of the federal IT and professional services companies are actually ahead of the broader stock market indexes this year.

The overall stock market has been depressed recently because of concerns about economic growth, while much of the stock performance in the federal group has been driven by acquisition activity. This year, GTEC’s shares climbed 44 percent following its acquisition by Ares Management, and SRA International’s shares are up 51 percent pending the closure of its acquisition by Providence Equity Partners. Also, investors have been bidding up shares of some other companies in anticipation of the next potential takeover announcement. So far in 2011, federal IT and professional services stocks are up more than 7 percent, above the S&P 500, which is up 1 percent and NASDAQ, which is down slightly, and also above the aerospace and defense stocks, which are up 3 percent.

Although growth in the federal market has slowed sharply during the past few years, most of the public companies are still growing even excluding the effects of recent acquisitions. For 2011, I am projecting the public federal services companies will show average earnings per share growth of 10 percent (including the effect of acquisitions) on 7 percent revenue growth (excluding the effects of acquisitions). However, to sustain growth into 2012, companies will need to see a very strong quarter of contract awards in September. Award activity has dropped off significantly for most companies so far in fiscal 2011, affected by the elections last fall and the budget battles that created a high level of uncertainty about future funding for programs.

With the full-year budget passed in April, I expect to see the typical government fiscal year-end award activity, perhaps even more so this year given the higher than normal level of uncertainty and resulting low award activity. Award activity has slowed to the point that for the first time in 10 years, backlog growth for the public companies turned negative. However, companies are indicating that activity is picking up, in some cases awards also, with most companies having a record or near-record amount of bids pending decision by the government.

Unfortunately, fiscal 2012 will likely have similar budget delays given the proximity to the next elections. As a result, I expect to see slow contract award activity late this year and into next year. Although the 2011 budget did not provide much insight into potential future program directions, the 2012 budget should, given it is starting with the new House leadership, with negotiations early on with the administration led by the vice president, while the Senate also works on its version.

The president’s 2012 budget submission in February is less relevant to what the actual budget will look like now given the outcome of the 2011 budget. A well-planned and negotiated budget should help give some confidence to government executives to move forward on funded programs, as it should lay a foundation to a longer-term vision of which programs will be cut, reduced or maintained. This higher level of certainty should also benefit contractors, which can then plan around program reductions and shift resources to better-funded areas.

Although IT spending under President Barack Obama’s 2012 budget request earlier this year was for $79.5 billion, up 1.3 percent from the 2011 continuing resolution, the final budget will likely have a lower level of spending, with reductions in the cost of maintaining and operating IT infrastructure being partially offset by growth in the areas of cloud computing, application development, mobile computing, cybersecurity and other growth, although smaller dollar, areas. IT spending will continue to show growth in the federal market longer term, as it is used to help government do more with less resources, including people, in the future.

Reader Comments

Please post your comments here. Comments are moderated, so they may not appear immediately after submitting. We will not post comments that we consider abusive or off-topic.

Please type the letters/numbers you see above

What is your e-mail address?

My e-mail address is:

Do you have a password?

Forgot your password? Click here
close
SEARCH
contracts DB

Trending

  • Dive into our Contract Award database

    In an exclusive for WT Insider members, we are collecting all of the contract awards we cover into a database that you can sort by contractor, agency, value and other parameters. You can also download it into a spreadsheet. Read More

  • Is SBA MIA on contractor fraud? Nick Wakeman

    Editor Nick Wakeman explores the puzzle of why SBA has been so silent on the latest contractor fraud scandal when it has been so quick to act in other cases. Read More

Webcasts

  • How Do You Support the Project Lifecycle?

    How do best-in-class project-based companies create and actively mature successful organizations? They find the right mix of people, processes and tools that enable them to effectively manage the project lifecycle. REGISTER for this webinar to hear how properly managing the cycle of capture, bid, accounting, execution, IPM and analysis will allow you to better manage your programs to stay on scope, schedule and budget. Learn More!

  • Sequestration, LPTA and the Top 100

    Join Washington Technology’s Editor-in-Chief Nick Wakeman as he analyzes the annual Top 100 list and reveals critical insights into how market trends have impacted its composition. You'll learn what movements of individual companies means and how the market overall is being impacted by the current budget environment, how the Top 100 rankings reflect the major trends in the market today and how the biggest companies in the market are adapting to today’s competitive environment. Learn More!