Market Share: Fourth quarter reports hold promise of strong 2005

Contract awards generally were lower than previous quarters for most companies, perhaps because of the elections and yet another delayed civilian budget. But potential bid pipelines continued to grow, with each company feeling positive about opportunities going forward.

Year to date, shares of the firms are down 7 percent, compared with commercial IT services being down 8 percent and the overall market nearly unchanged for the year.
Despite the strong results and outlook in the federal IT industry, investors are still nervous about cuts in defense spending. Some of this nervousness could dissipate as Congress works on the fiscal 2006 budget, which should be similar to the president's favorable budget request, and as companies in this space continue to report good results and outlook.

Anteon International Corp. reported strong fourth quarter earnings-per-share growth of 36 percent year over year. The company's organic growth was 20 percent, the strongest since the second quarter of 2003. Anteon also indicated its pipeline jumped from $12 billion to $15 billion, and showed an increase in its backlog. Anteon is projecting EPS growth of "at least" 14 percent in 2005.

SI International Inc. reported EPS 15 percent higher year over year, excluding nonrecurring fees. Total revenue growth for SI was 58 percent, while organic growth was 20 percent. SI is projecting pro forma EPS growth of 7 percent to 11 percent this year.

MTC Technologies Inc. reported EPS growth of 7 percent on revenue growth of 28 percent. MTC is projecting strong EPS growth of 23 percent to 36 percent for 2005.

PEC Solutions Inc. reported flat fourth quarter EPS on 53 percent higher revenue and low-to-mid-single-digit organic revenue growth. After posting EPS declines over the past two years, PEC is projecting 21 percent to 26 percent EPS growth this year.

ManTech International Inc.'s shares are rebounding as it recovers from its troubled security clearance investigation contract. The company is divesting the unit, and its receivables have been fully paid on the contract. Fourth quarter EPS grew only 7 percent for ManTech, but the company is projecting strong EPS of $1.40 to $1.50 this year, well above the 76 cents reported last year and the $1.09 in 2003.

Acquisition activity could also attract investors to federal IT stocks. Northrop Grumman Corp. is buying privately held Integic Corp. for an undisclosed sum. However, Xerox Corp., which we estimate had about a one-third position in Integic, announced its position in the company is expected to be acquired for $96 million.

Integic has a solid market position in government IT health care systems, a market that other firms have shown strong interest in as well.

Both Lockheed Martin Corp. and BAE Systems Plc have made acquisitions this year that were focused more on pure defense systems and services versus IT services. With the outlook for fiscal 2006 federal IT spending, as well as defense services spending, looking good, I believe there will likely be several other acquisitions in the federal IT services sector this year. n

Bill Loomis is a managing director of the Technology Research Group at Legg Mason Wood Walker Inc. He can be reached at wrloomis@leggmason.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: Legg Mason Wood Walker, Inc., 100 Light St., P.O. Box 1476, Baltimore, MD 21203, Attn: Research Department.