Market Share

Last year was tremendous for federal information technology companies. Federal IT stocks outperformed their commercial counterparts by several times, and valuations reached record levels.Investors began to appreciate the long-term, predictable, relatively low-risk federal IT and professional and technical services business, especially after many commercial IT service companies began missing their earnings targets. Investor excitement increased after Sept. 11 because of the government's increased commitment to combat terrorism.Now, federal IT companies will have to deliver on investors' increased expectations.The federal government's fiscal 2002 budget, particularly defense, had strong growth, and the administration's early comments about fiscal 2003 suggest continued strong defense, intelligence and information assurance spending. However, a growing deficit, together with upcoming elections and other high-profile issues, such as welfare reform reauthorization, could threaten the proposed 2003 increases. The story is quite different on the commercial side, however. Demand for outsourcing continues to be very strong, but systems integration, application development and IT consulting continue to be weak. While most companies believe business has stabilized in systems integration and consulting, no one is expecting a quick rebound. Also, Europe continues to show good growth in IT spending, while North America lags.While the outlook for state and local government IT spending is cloudy, the companies I track generally have reported they expect growth in 2002 in their state IT units. As states prepare their 2003 budgets this spring, we will have a better idea how these fiscal pressures will impact state IT spending later this year. I believe federal companies will generally report good results. Accenture's government unit (11 percent of total revenue) posted a remarkably strong 58 percent increase in revenue last quarter. Among the public federal IT companies, investors are expecting CACI International Inc. to report fourth quarter earnings per share of 30 cents, up 43 percent from a year ago. For Titan Corp., investors are expecting lower EPS of 14 cents vs. 23 cents a year ago. Dynamics Research Corp. is expected to report EPS of 20 cents vs. 13 cents a year ago. The consensus EPS estimate for PEC Solutions Inc. is 12 cents vs. 8 cents a year ago, up 50 percent. Investors seem to be expecting such strong growth, given the stock is trading at a price-to-earnings ratio of 58 based on the consensus EPS estimate of 64 cents for 2002. PEC management clearly has done a great job of building the company's market value, and now has the challenge of maintaining it. To put PEC's $1.1 billion market capitalization in perspective, in 1997, the $1.1 billion-in-revenue BDM International was sold to TRW Inc. for $1 billion, including BDM's debt. So far, 2002 is shaping up to be another good year for the federal IT companies, while most of the commercial companies continue to face tough times.