Savvy IT firms buck trend, gain share

Market Share | Financial views of a competitive environment

The stocks of federal information technology and professional
services companies are performing in line with
the S&P 500 this year. Both are down about 6 percent,
while aerospace and defense companies' stocks are having
another solid year and are up 7 percent.

Aerospace and defense stocks continue to
be driven by record earnings as defense
spending remains strong. The strong earnings
trend for the defense firms will likely continue
for the next couple of years, with requested
defense spending for fiscal 2009 up 7 percent.

Most of the senior managers we spoke to say
they do not expect major changes in defense
spending no matter who wins the presidential
election, but they predict a slower growth
environment in the future.

Any future military and terrorist events
will likely have the most
impact on defense spending.
But until such events occur,
history will likely repeat itself.

In addition, domestic spending
and deficit reduction efforts
could put pressure on defense
spending similar to the pressure
that existed at the end of other defense
spending cycles in the 1970s and 1990s,
when double-digit percentage spending
declines occurred.

Although Wall Street tends to look ahead,
it's not willing to look that far ahead. The
commercial practices of some of the aerospace
and defense firms might cause some
drag on results, but strong defense earnings
will likely result in a continued ability to outperform
for the aerospace and defense firms.

This will be the case at least until the economy
improves, and Wall Street decides to focus
on more economically sensitive investments.
For the federal IT and professional services
companies, we expect continued modest budget
growth during the next few years.

Despite a low single-digit percentage
growth market, some federal IT and professional
services firms are continuing to gain
significant market share. Stanley Inc. led
public companies in growth in the first quarter,
reporting March quarter results ahead of
expectations, with strong contract awards.

The company's organic revenue growth,
which excludes the impact of acquisitions, for
the quarter was 39 percent, to $173 million in
sales, while its earnings per share (EPS) were
33 cents, up 67 percent year-over-year.

NCI Inc. reported first-quarter 2008
results ahead of expectations, raised its
2008 outlook and posted strong increases in
its contract awards and bid pipeline. NCI
had organic revenue growth of 16 percent,
to $91 million in sales, and EPS of 27 cents
were a penny ahead of analyst estimates.

The strong earnings report sent NCI's stock
to a new high. At one point, it was up 38
percent year-to-date, though the stock
has pulled back on profit taking.

ManTech International Corp. reported
first-quarter results that were particularly
impressive given the company's size
($1.7 billion in annual revenue), with
organic growth of 19 percent and EPS
growth of 46 percent. ManTech continues
to gain market share in the higher
margin, well-funded defense and intelligence
services market, while increasing
profit margins in the process. ManTech
has an 8 percent operating
profit margin, above the
7.3 percent average for the
public IT and professional
services firms. If you don't
consider the company's
largest contract, which has
only 2 percent operating
margins due to passthroughs, the operating
profit margin climbs to 9 percent. Despite
modest budget growth, some companies will
always find the recipe to grow much faster.

Bill Loomis ( 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 and current
disclosures for the companies discussed herein,
please write to: Stifel Nicolaus, One South St.,
Baltimore, MD 21202, Attn: Research

About the Author

Bill Loomis is a managing director at Stifel Nicolaus.

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