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Investors Focus on Earnings Reports

Bill Loomis

By Bill LoomisOver the next few weeks, investors will focus on earnings reports, looking for answers in a confusing business environment. While many commercial IT services firms have pre-announced weaker results for the fourth quarter, we anticipate most will likely announce lower earnings expectations for the coming year after they report full fourth quarter results.Visibility on business among the commercial electronic business service companies is low. This seems to be due to clients who are unsure about visibility in their own businesses because of the slowing economy. Interestingly, very few traditional IT service firms, such as Keane Inc. or American Management Systems Inc., have pre-announced lower expectations. While I believe business is also difficult for these companies, most traditional IT service firms have been lowering expectations for the last year or two as Y2K business has dwindled." Among the federal IT service companies, there were some short-term disruptions because of the even-longer-than-usual federal budget negotiations, but generally, business seems to be on track. In the coming quarters, there could be disruptions to some programs as federal agency priorities change with the new agency heads.Ironically, I think the biggest risk to federal IT service companies' earnings over the next couple quarters will come from their commercial business, which tends to make up around 20 percent of revenue for the average federal IT service company we track. Longer-term trends appear quite positive for federal and state government IT service companies, with a new administration that favors outsourcing and also one that likely will boost defense spending, though it could be a year or two for new initiatives to trickle down to the contractors. The acute labor shortage among government IT service companies also seems to be easing as the New Economy continues to shrink and the stability of government IT service companies grows more compelling. Among the public federal IT companies, the December quarter consensus earnings per share (EPS) estimate for BTG Inc. is 15 cents vs. 13 cents a year ago, up 15 percent. For CACI Inter-national Inc., investors are expecting EPS of 41 cents vs. 39 cents, up 5 percent.For Titan Corp., investors are expecting 23 cents per share, excluding the large amount of goodwill charges Titan is incurring because of acquisitions. PEC Solutions Inc. is expected to report EPS of 8 cents vs. 7 cents a year ago, up 14 percent. Maximus Inc., a company focusing more on state and local government outsourcing, is expected to report EPS of 39 cents vs. 36 cents a year-ago, up 8 percent. AMS, which now has more than half of its revenue from government (about evenly split between federal and state), is expected to report EPS of 40 cents vs. 44 cents. As these anticipated EPS growth rates show, investors still are looking for growth among most of the government IT companies, though expectations are generally modest. Bill Loomis is managing director of the technology research group at Legg Mason Wood Walker Inc., Baltimore. He can be reached at wrloomis@leggmason.com. Legg Mason Wood Walker makes a market in the shares of American Management Systems, BTG, CACI International and PEC Solutions. Within the past three years, Legg Mason Wood Walker has managed or co-managed an underwriting of Maximus and PEC Solutions. Maximus is a Legg Mason select list compelling idea. This information is based on sources believed to be reliable but is not guaranteed as to completeness or accuracy and is not intended to be an offer to buy or sell any security. Opinions expressed are subject to change. Additional information available upon request.

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