Ross Wilkers

MARKET OUTLOOK

Firms expected to report heavy September bookings

The coming round of earnings reports from large services contractors is set to continue a trend in recent years that sees the government’s fourth fiscal quarter and September in particular being the strongest period for award flow.

This year’s September could be especially active with defense agencies getting an added boost to their operations and maintenance accounts from the government spending bill signed in May, research analysts at investment bank Cowen & Co. noted Thursday in a report for investors ahead of calendar third quarter earnings season for many companies.

Here is the backdrop: The appropriations bill signed in May to fund the government for the remainder of fiscal 2017 included $15 billion in added supplemental defense spending. Within that is a 6 percent increase in operations and maintenance appropriations for defense agencies.

That comes on top of what agencies have over the last decade turned into a “spending spree” in the government’s fourth quarter. The government spent much of fiscal 2017 under long-term continuing resolutions that froze funding at current levels except for this year’s May-September period.

Defense agencies have spent roughly 31 percent of their contracting budgets in the fourth quarter over the last five years versus the 22 percent to 23 percent levels for the other three quarters, Deltek’s Kevin Plexico told our July 20 Industry Day event. For civilian agencies, the fourth quarter number jumps to 34 percent versus 18 percent to 24 percent over the other three quarters.

There may be a catch to this year’s spending spree period however in light of President Donald Trump’s fiscal 2018 “skinny budget” blueprint.

The blueprint seeks large cuts to civilian agencies like the Environmental Protection Agency, and Energy and State departments. Analysts at Cowen see some restrained activity and softness among civilian agencies in the fourth quarter in conjunction with bookings strength in defense and intelligence areas.

And there is also the trend I wrote about in August on how many agencies are opting for contract extensions and modifications in light of delays over large award decisions that require input from political appointees. Contractors have cited those vacancies as headwinds to their financial results and will likely update investors on that trend when they next state earnings.

In their report, Cowen analysts increased their stock price targets for CACI International, Leidos and ManTech International as companies they expect to reap benefits from the heightened September flow.

A price target represents an analyst’s expectation on what the future price of a company’s stock will become, typically over 12 months. A stock achieving that target means traders and investors get the best possible outcome for their investment.

Average third calendar year quarter book-to-bill ratios for large public government services firms should exceed 2.0, Cowen analysts noted. That ratio measures the rate at which companies add contracts into their backlog, and then draw down from that backlog and realizes revenue.

Engility, Leidos, ManTech and CACI will report their latest quarterly earnings Nov. 1 and Nov. 2. Engility, Leidos and ManTech run their fiscal years on a calendar basis. CACI will state first quarter results as its fiscal calendar runs July-June.

Booz Allen and CSRA will unveil their second fiscal quarter results Nov. 6-7. 

About the Author

Ross Wilkers is a senior staff writer for Washington Technology. He can be reached at rwilkers@washingtontechnology.com. Follow him on Twitter: @rosswilkers. Also find and connect with him on LinkedIn.

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