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From the Survey: ManTech International
ManTech International Corporation (MANT) has its hand in various national security missions as a leading provider of technology solutions and services. The company supports defense initiatives, such as military readiness, information security, border protection, and terrorist threat detection, through a number of government contracts. Doors opened in 1968 with the development of a war simulation model for the U.S. Navy. Since then, a reputation for quality program performance has fostered lasting relationships and expanded business into the intelligence, law enforcement, science, and diplomacy sectors.
More than a decade after its February 2002 IPO, the company's chief source of revenue is still our nation’s largest consumer – The Federal Government. Over 60 agencies throughout the defense and intelligence community make up ManTech’s client list, including the Department of Defense, Department of Homeland Security, the Federal Bureau of Investigation, NASA, and all four branches of the military. Additionally, more than half of the Federal budget is designated for defense-related needs, and it is estimated that nearly 70% of classified intelligence spending goes towards private contracts each year. Still, the November general election made it clear that the war on terror will likely take a back seat to economic concerns on the home front in the years ahead. The unsustainable nature of recent federal spending has put pressure on entire industries, especially those that rely on government contracts. Any Congressional action before January 2013, and the possibility of sequestrations in the absence of an agreement, would certainly change ManTech’s outlook. Until then, however, share prices should continue to reflect uncertainty.
COMPETITION & RISK
In 2011, Over 95% of its business was funded by the intelligence community and the Department of Defense. This level of dependence has caused the company to focus both organic growth and its aggressive pursuit of acquisitions on prime contract positions, as opposed to subcontract work, in order to maintain revenues. This strategy should become progressively more important as defense agencies cut back and contracts become less attainable.
Also crucial to earnings is how ManTech handles a more competitive arena. Industry leaders expect federal intelligence agencies to rely heavily on their most trusted partners instead of spreading out work among different companies. ManTech’s stellar win rate (72% in the September 2012 period) benefits from its global reach, good anticipation of U.S foreign policy, and close proximity with customers. However, these characteristics are not unique. Private contractors that take in the largest revenues, such as McKesson Corporation (MCK), SAIC (SAI), Hewlett-Packard (HPQ – Free Hewlett-Packard Stock Report), Northrop Grumman (NOC), and Lockheed Martin (LMT), all have employees who work along side customers, making it easy to adapt with their needs.
PERFORMANCE & PLAN FOR GROWTH
A changing environment is not all bad for those in the technology sector, particularly those who work with the U.S. Government. Defense and intelligence agencies increasingly rely on innovation to keep one step ahead of their international peers. Through three distinct operating groups, ManTech should be able to deploy positive growth initiatives. Services are geared towards specific long-term goals by providing access to a vast set of solutions, all of which can be bundled together to produce an individualized product. Moreover, strict financial management has left the company with the ability to make appropriate investments in a timely matter.
In fact, most of ManTech’s prime contract wins are the result of successful acquisitions. The base of ManTech’s Technical Service Group is strong and growth should continue in the cyber security and C4ISR (Command, Control, Communications, Computers, Intelligence, Surveillance, and Reconnaissance) lifecycle support segments. Work surrounding the Army’s MRAP (Mine-Resistant Ambush Protected) and S3 (Strategic Services Sourcing) vehicles is set to provide a solid stream of revenues for years to come. However, focus on higher-end services and advanced products are vital if the company wants to generate meaningful earnings. In this regard, recent results are positive; reaffirming that ManTech is capable of offering differentiated products. The AMBIANCE project is helping the Department of Defense transform its business into a cloud-based operation. The addition of TranTech and Worldwide Information Network Systems, which mainly widened IT services and improved software development for the Defense Intelligence Agency, further closed the gap between ManTech and the industry’s giants, such as L-3 Communications (LLL), CACI International (CACI), and Booz Allen Hamilton (BAH).
The 2012 acquisitions of HBGary and Evolvent Technologies both have not ramped up as quickly as expected. These moves do reflect the company’s growth strategy, however. Management has shown interest in expanding successful applications to new customers. For example, Evolvent is a first step for the company as it enters the healthcare information technology market. Additionally, security along our southern border and our nation’s heightened attention for Pacific threats could be a source of revenues in the future.
A history of financial discipline and the ability to generate sustaining growth usually ends with positive earnings. However, ManTech faces headwinds in light of the federal deficit and the military’s recent exit from Iraq and Afghanistan. Revenues should be much more difficult to come by as the country pursues a new less-ambitious defense strategy. Moreover, the pursuit of prime contracts has hurt margins due to increased costs.
For those interested in learning more about ManTech’s prospects, along with the particular investment merits of the stock, subscribers should review our full report in The Value Line Investment Survey.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.