Wall Street Accepts Infotech Offerings

However, some investment analysts still sniff at companies that rely heavily on government business

echnology stocks continue to top the list of initial public offerings this year. That's good news for information technology companies such as BDM International Inc., which want to take advantage of Wall Street's growing acceptance of infotech stocks as viable investments.

The McLean, Va., systems integrator recently announced that it plans to offer 2.5 million shares at $17 to $19. The company wanted to make the offering last year but pulled out when interest rates began to climb.

For years, infotech service providers, especially those entrenched in the federal market, claimed they got a raw deal by Wall Street investors. Defense and government cutbacks in general hurt the companies because they got painted with the same brush as other defense contractors, said Doug Schmidt, senior vice president of Ferris Baker Watts Inc.'s investment banking department.

With the consolidations and downsizing, both in the commercial and federal markets, investors see the value of infotech service providers as a way to compensate for reductions in force and smaller budgets. "What we're trying to highlight is the IT component, and that part is growing. That's true in the federal and commercial markets," Schmidt added.

Take BTG Inc., for example. Last December, the Vienna, Va., company specializing in intelligence systems initially offered 1.6 million shares at $8 per share. The stock's 52-week value has fluctuated between $6.2 and $10, with stocks trading around $9 last week. Analysts predict a 12-month target price of $10 to $12. Earnings per share could increase as much as 32 percent during the next year, up from $.38 in fiscal 1994.

For some investment analysts, however, BTG's exposure to government contracts makes it a somewhat risky investment. More than 90 percent of BTG's annual revenues come from government work.

BDM, which posted $774.2 million in revenues in 1994, could face the same problem. Last year, it generated 86 percent of revenues from government work, including foreign-, defense- and state government-related contracts. In 1993 though, BDM relied even more on government business, with commercial work accounting for only 5 percent of its total $558.3 million in revenues.

Although the government relies on longer-term contracts with agencies that represent less of a credit risk, the profit margins speak for themselves. Margins of infotech services companies that do business in the commercial sector versus the government market runs almost 2 to 1.

That ratio makes analysts such as Bill Rabin of J.P. Morgan Securities Inc. hesitant about recommending stocks of companies that do significant work with the government. He believes "the disadvantages outweigh the advantages. I am not a big fan of government issues because of the lower margins."

Cambridge Technology Partners, an IT services company that does commercial work exclusively, has had a far different experience than BTG on Wall Street. In May 1993, it offered its shares at $5 per share, and by the end of the year, the company's stock value increased 215 percent. The market's reception of the Massachusetts-based company's initial public offering so exceeded expectations that in March 1994 CTP followed with a second offering. Shares went for $30. CTP's stocks traded around $32 last week, with the 52-week value ranging from $14 to $36.25.

"We've been working for a couple of years," said Schmidt, "to convince Wall Street investment funds that the earnings growth and substantial stock price increases are well above the average market."

According to an analysis by Ferris Baker Watts of the infotech services' industry index last year, IT companies outperformed the Standard & Poor 500 list. Stocks for companies with primarily commercial contracts increased 38.6 percent, while those for government-reliant businesses rose 11.2 percent and the S&P 500 dropped 1.5 percent.

Likewise, in price to earnings comparisons, IT companies come out ahead. Last year, the P/E ratio of commercial companies increased from 20.2 to 21.9 and the ratio for government IT service providers rose from 13.8 to 14.4. The P/E for the Standard & Poor 500 declined from 23.6 to 17.0.

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