Cybersecurity looms as a top opportunity

A new administration and cybersecurity will spur growth for well-positioned federal information technology companies.

While most industries are suffering in the current economic downturn and credit crisis, the federal information technology and professional services industry is doing well. Most of the companies I speak with indicate they have a strong pipeline of bid opportunities and are seeing good contract funding, which is driving growth and earnings higher.

Investors are noticing as well. Public federal IT and professional services firms' stock prices ended 2008 with a 6 percent gain while the broader stock market experienced a 39 percent decline, as measured by the S&P 500. For the first time in many years, the stocks of federal IT services firms outperformed defense and aerospace stocks, which ended 2008 down 10 percent. Investor concerns about the new administration's review of big defense programs and the slowdown in commercial aerospace-related business have hurt tier-one company shares.

One of the biggest positive factors investors will focus on in 2009 is growth in federal cybersecurity spending, while one of the biggest negatives will be growing contract protests. Protests often delay the start of new contracts, thus hurting earnings growth and disappointing investors. A Government Accountability Office report released in December indicated that the number of bid protests on government contracts in fiscal 2008 was 17 percent higher than in fiscal 2007 and at its highest level since fiscal 1998. Furthermore, that increase came on top of a 6 percent increase in fiscal 2007. The report also notes that GAO sustained protests at a rate of 21 percent in fiscal 2008, down from 27 percent in fiscal 2007.

The new administration has cited acquisition reform and increased investments in the acquisition workforce as priorities — which should theoretically reduce the number of bid protests — but those efforts likely will not have an impact in the near term.

One of the biggest opportunities for federal IT firms in the next few years will be work related to cybersecurity, which is a high priority for the Obama administration. The $10 billion or more being spent on cybersecurity in the next five years will attract many companies. But I believe it will be hard for firms without key contract vehicles and strong past-performance qualifications to compete for much of the work -- at least as a prime contractor -- because it will largely come as task orders under existing indefinite-delivery, indefinite-quantity contracts or as add-on work to existing awards when they are re-competed.

Also, the agencies with the greatest amount of funding for cybersecurity projects — at least initially — are those that have enjoyed strong funding since the 2001 terrorist attacks, which includes the Defense Information Systems Agency and the Homeland Security Department.

The outlook for contractors well-positioned with intelligence agencies is positive — not only because the intelligence agencies have a leadership position on cybersecurity initiatives, but also because of the likely continuing high demand for intelligence, surveillance and reconnaissance products and services. That demand will result from the Obama administration's continuing the war on terrorism — as evidenced by the expected doubling of U.S. troops in Afghanistan — and its increased emphasis on soft power, or diplomacy, with information being a key asset.

Overall, nondefense intelligence agency budgets grew 9 percent, to $47.5 billion in fiscal 2008, according to the Office of the Director of National Intelligence. Funding under the national cybersecurity initiative should result in continued strong growth during the next few years.

Bill Loomis (wrloomis@stifel.com) is a managing director at Stifel Nicolaus. 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, please go to the research page at Stifel.com.

X
This website uses cookies to enhance user experience and to analyze performance and traffic on our website. We also share information about your use of our site with our social media, advertising and analytics partners. Learn More / Do Not Sell My Personal Information
Accept Cookies
X
Cookie Preferences Cookie List

Do Not Sell My Personal Information

When you visit our website, we store cookies on your browser to collect information. The information collected might relate to you, your preferences or your device, and is mostly used to make the site work as you expect it to and to provide a more personalized web experience. However, you can choose not to allow certain types of cookies, which may impact your experience of the site and the services we are able to offer. Click on the different category headings to find out more and change our default settings according to your preference. You cannot opt-out of our First Party Strictly Necessary Cookies as they are deployed in order to ensure the proper functioning of our website (such as prompting the cookie banner and remembering your settings, to log into your account, to redirect you when you log out, etc.). For more information about the First and Third Party Cookies used please follow this link.

Allow All Cookies

Manage Consent Preferences

Strictly Necessary Cookies - Always Active

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Sale of Personal Data, Targeting & Social Media Cookies

Under the California Consumer Privacy Act, you have the right to opt-out of the sale of your personal information to third parties. These cookies collect information for analytics and to personalize your experience with targeted ads. You may exercise your right to opt out of the sale of personal information by using this toggle switch. If you opt out we will not be able to offer you personalised ads and will not hand over your personal information to any third parties. Additionally, you may contact our legal department for further clarification about your rights as a California consumer by using this Exercise My Rights link

If you have enabled privacy controls on your browser (such as a plugin), we have to take that as a valid request to opt-out. Therefore we would not be able to track your activity through the web. This may affect our ability to personalize ads according to your preferences.

Targeting cookies may be set through our site by our advertising partners. They may be used by those companies to build a profile of your interests and show you relevant adverts on other sites. They do not store directly personal information, but are based on uniquely identifying your browser and internet device. If you do not allow these cookies, you will experience less targeted advertising.

Social media cookies are set by a range of social media services that we have added to the site to enable you to share our content with your friends and networks. They are capable of tracking your browser across other sites and building up a profile of your interests. This may impact the content and messages you see on other websites you visit. If you do not allow these cookies you may not be able to use or see these sharing tools.

If you want to opt out of all of our lead reports and lists, please submit a privacy request at our Do Not Sell page.

Save Settings
Cookie Preferences Cookie List

Cookie List

A cookie is a small piece of data (text file) that a website – when visited by a user – asks your browser to store on your device in order to remember information about you, such as your language preference or login information. Those cookies are set by us and called first-party cookies. We also use third-party cookies – which are cookies from a domain different than the domain of the website you are visiting – for our advertising and marketing efforts. More specifically, we use cookies and other tracking technologies for the following purposes:

Strictly Necessary Cookies

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Functional Cookies

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Performance Cookies

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Sale of Personal Data

We also use cookies to personalize your experience on our websites, including by determining the most relevant content and advertisements to show you, and to monitor site traffic and performance, so that we may improve our websites and your experience. You may opt out of our use of such cookies (and the associated “sale” of your Personal Information) by using this toggle switch. You will still see some advertising, regardless of your selection. Because we do not track you across different devices, browsers and GEMG properties, your selection will take effect only on this browser, this device and this website.

Social Media Cookies

We also use cookies to personalize your experience on our websites, including by determining the most relevant content and advertisements to show you, and to monitor site traffic and performance, so that we may improve our websites and your experience. You may opt out of our use of such cookies (and the associated “sale” of your Personal Information) by using this toggle switch. You will still see some advertising, regardless of your selection. Because we do not track you across different devices, browsers and GEMG properties, your selection will take effect only on this browser, this device and this website.

Targeting Cookies

We also use cookies to personalize your experience on our websites, including by determining the most relevant content and advertisements to show you, and to monitor site traffic and performance, so that we may improve our websites and your experience. You may opt out of our use of such cookies (and the associated “sale” of your Personal Information) by using this toggle switch. You will still see some advertising, regardless of your selection. Because we do not track you across different devices, browsers and GEMG properties, your selection will take effect only on this browser, this device and this website.