GovCon's 'safe haven' faces two major tests

The government contracting market is generally considered a safe market but the looming budget challenge and challenges around hiring will test its 'safe haven' reputation.

Analysts have highlighted how government services companies are relatively more insular than other sectors from the turmoil and volatility looming over global financial markets regarding uncertainty over trade.

In a research note for clients released Thursday, Wells Fargo Securities attributed the industry’s “safe haven” status to the fact that federal budgets have limited sensitivity to the broader economy and agencies have more visibility in a currently favorable funding environment.

Two main headwinds loom over the market: whether another two-year budget agreement can move through Congress and get signed before the next fiscal year starts Oct. 1. Without a deal, spending caps return to sequestration-level numbers laid out in the Budget Control Act.

Another issue the analysts identified is talent: whether companies can adequately staff up their ranks of cleared IT and cyber workers amid an industry-wide shortage of them.

The analyst report came in the same week of Leidos’ investor day presentation in New York City that saw executives give outlooks both of how the sees itself and the market it participates in: both of which were positive.

Leidos lifted their growth expectations for the next three years on expectations that elevated government spending on IT modernization and other digital transformation work that includes cloud migrations and data optimization.

At $10 billion in annual revenue, Leidos stands alone as the largest publicly-traded government services company thanks to its merger with Lockheed Martin IT services business three years ago.

Leidos is using that added weight on two fronts: its ongoing attempt to wrestle away the $3.4 billion Navy “NGEN” IT services contract from incumbent Perspecta, and starting to look at acquisitions again.

The government services landscape is much different than when Leidos closed the merger and even compared to last year. When the deal closed, the market was just beginning to stabilize somewhat after years of downturns.

Fast forward from there to last spring, when the current two-year budget agreement was passed nearly seven months into the 2017 fiscal year. Agencies had the budgets but “were very slow to spend” later that summer, CEO Roger Krone told investors Tuesday.

Now “you are seeing continued strong… not only appropriations but authorizations and actually spend by our customers,” Krone said. “We’re seeing them actually spend after budget now.”

The analysts also lifted their rating for SAIC on its integration of Engility Corp. after that acquisition closed in January. Engility boosts SAIC’s top line to $6.5 billion in annual revenue and makes the buyer a top three services market player.

SAIC gained an almost $1 billion intelligence community business through the deal and doubled the size of its space portfolio, also to nearly $1 billion.

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