Savvy IT firms buck trend, gain share

The stocks of federal information technology and professionalservices companies are performing in line withthe S&P 500 this year. Both are down about 6 percent,while aerospace and defense companies' stocks are havinganother solid year and are up 7 percent.Aerospace and defense stocks continue tobe driven by record earnings as defensespending remains strong. The strong earningstrend for the defense firms will likely continuefor the next couple of years, with requesteddefense spending for fiscal 2009 up 7 percent.Most of the senior managers we spoke to saythey do not expect major changes in defensespending no matter who wins the presidentialelection, but they predict a slower growthenvironment in the future.Any future military and terrorist eventswill likely have the mostimpact on defense spending.But until such events occur,history will likely repeat itself.In addition, domestic spendingand deficit reduction effortscould put pressure on defensespending similar to the pressurethat existed at the end of other defensespending cycles in the 1970s and 1990s,when double-digit percentage spendingdeclines occurred.Although Wall Street tends to look ahead,it's not willing to look that far ahead. Thecommercial practices of some of the aerospaceand defense firms might cause somedrag on results, but strong defense earningswill likely result in a continued ability to outperformfor the aerospace and defense firms.This will be the case at least until the economyimproves, and Wall Street decides to focuson more economically sensitive investments.For the federal IT and professional servicescompanies, we expect continued modest budgetgrowth during the next few years.Despite a low single-digit percentagegrowth market, some federal IT and professionalservices firms are continuing to gainsignificant market share. Stanley Inc. ledpublic companies in growth in the first quarter,reporting March quarter results ahead ofexpectations, with strong contract awards.The company's organic revenue growth,which excludes the impact of acquisitions, forthe quarter was 39 percent, to $173 million insales, while its earnings per share (EPS) were33 cents, up 67 percent year-over-year.NCI Inc. reported first-quarter 2008results ahead of expectations, raised its2008 outlook and posted strong increases inits contract awards and bid pipeline. NCIhad organic revenue growth of 16 percent,to $91 million in sales, and EPS of 27 centswere a penny ahead of analyst estimates.The strong earnings report sent NCI's stockto a new high. At one point, it was up 38percent year-to-date, though the stockhas pulled back on profit taking.ManTech International Corp. reportedfirst-quarter results that were particularlyimpressive given the company's size($1.7 billion in annual revenue), withorganic growth of 19 percent and EPSgrowth of 46 percent. ManTech continuesto gain market share in the highermargin, well-funded defense and intelligenceservices market, while increasingprofit margins in the process. ManTechhas an 8 percent operatingprofit margin, above the7.3 percent average for thepublic IT and professionalservices firms. If you don'tconsider the company'slargest contract, which hasonly 2 percent operatingmargins due to passthroughs, the operatingprofit margin climbs to 9 percent. Despitemodest budget growth, some companies willalways find the recipe to grow much faster.