On Nov 4, we reiterated our Neutral recommendation for technical services provider CACI International Inc. (CACI). The company’s diligent execution of operational plans, strategic decision to extend its global footprint and continuous organic growth across the industry verticals augurs well for its growth prospects. However, continuous budgetary pressures along with a weak macroeconomic environment could weigh on the margins moving forward.
A leader in IT outsourcing for the U.S. federal government, CACI International has ample exposure to the rapidly growing Department of Defense (DoD) and Department of Homeland Security budgets. CACI International’s system integration skills and intelligence expertise consume a significant portion of the funds earmarked for the Department of Homeland Security, while creating systems that foster the sharing of critical information among all intelligence agencies. We believe the company is comfortably positioned, given its favored relationship with the DoD. Moreover, cyber attacks are creating increasing awareness, leading to more demand for cyber solutions.
CACI International also has a large pipeline of new projects and continues to win more deals at regular intervals. These back-to-back contract wins are the key catalysts driving success perennially for the company. Furthermore, having the government as a big client lends stability to the business and moderates fluctuations in revenues. Although the government generally has a lengthy approval process, the projects earn money for a number of years after it is approved. Moreover, government contracts also improve the visibility of future revenue streams. Therefore, the company’s robust business model is likely to help it grow and achieve newer heights.
Subsequent to the end of first-quarter fiscal 2014, CACI International inked a definitive agreement to acquire Six3 Systems, Inc. for $820 million in cash in one of the largest transactions of its kind in its history. With approximately 1,600 employees and expected revenues of $470 million in 2013, the acquisition expands CACI International’s addressable market by approximately $15 billion. Furthermore, Six3 Systems adds distinctive cyberspace, C4ISR (Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance), and intelligence capabilities to CACI International solutions and services and augments its customer base. CACI International expects the acquisition to be at least 5% and 10% accretive to GAAP and adjusted earnings per share, respectively, for calendar year 2014.
However, given the challenging macroeconomic environment, management is not bullish for fiscal 2014. It appears that management is finding it quite onerous to battle the fiscal pressures and precarious budgetary situation – a challenging situation to grapple with at present. In addition, CACI International faces concentration risk and stiff competition from other players in the industry, which undermines its growth potential to some extent.
Other Stocks to Consider
CACI International currently has a Zacks Rank #3 (Hold). Other stocks that look promising and are worth considering in the industry are LogMeIn, Inc. (LOGM), Computer Sciences Corporation (CSC) and iGATE Corporation (IGTE), each carrying a Zacks Rank #2 (Buy).