Investors tend to avoid companies that generate too much revenue
from one key customer or project. If that project ends, sales could
easily plunge. That fear is the key reason behind a sharp sell-off
in shares of
, a key government contractor in Iraq. Shares have fallen from over
$20 last summer to a recent $11. But things are beginning to look
To be sure, the recent elections in Iraq indicate that the U.S.
presence in the country is bound to diminish, and Dyncorp is poised
to generate weaker sales and profits from projects in Iraq. Yet
investors appear to be overlooking the fact that Dyncorp has been
building a robust backlog elsewhere in the world, and looks set to
keep boosting sales and profits.
Dyncorp offers a very wide range of services to Uncle Sam and other
governments including: police and military training, intelligence
services, security, linguistics and translation services, aviation
fleet management and logistics . Contracts for these services
typically appear large in terms of dollar size, but profit margins
are fairly thin. Dyncorp typically generates operating margins of
around 5% or 6%.
Dyncorp provides a range of services in Afghanistan including food
service, vehicle maintenance, power generation, sanitation, etc.
Most importantly, the company is training police officers and
soldiers in order to eventually enable the Afghan government to
provide its own security.
To be sure, operations in Afghanistan will eventually wind down,
but Dyncorp continues to pursue new business in many other
countries. For example, the company provides ongoing support
services to all eight U.S. military bases in Kuwait. And recent
acquisitions have helped bring exposure to government consulting in
areas such as anti-corruption and anti-drug efforts. As Washington
seeks to rein in budget deficits, Uncle Sam may not throw much more
business to Dyncorp in the foreseeable future. But other countries
are expected to deepen their relationship with the company.
As a result, Dyncorp's backlog stood at $6.1 billion at the start
of 2010, which represents about 20 months of annualized revenue. On
a recent conference call, Dyncorp's management ran through a host
of new bids that the company is chasing. It appears that backlog
will at least stay flat if not grow in coming quarters. This should
help the company to maintain sales growth in the +5% to +10% range.
Fiscal 2009 sales grew +45% and look set to grow about +10% in the
fiscal year that ends later this month. Dyncorp looks set to earn
around $1.35 a share and generate around $225 million in EBITDA in
fiscal 2010. Those numbers look pretty intriguing in relation to
the current stock price.
After the steady downdraft in shares during the last six months,
they now trade for about 8.3 times earnings -- a P/E ratio roughly
half the market average. Rivals
trade at 13.2 and 15.2 times projected 2010 profits. The key profit
catalyst for Dyncorp now is new contract awards, which as
management noted, could be announced in coming weeks and months. As
they roll in, investors will gain increased confidence that sales
and profits can keep growing, and those ultra-low valuations should
start to attract the value crowd.
-- David Sterman
P.S. If taking investment cues from Uncle Sam is your thing,
then what my colleague, Andy Obermueller, uncovered should be a
must read. In this month's issue of Government-Driven Investing,
Andy uncovers two stocks that are cashing in on a $52 billion
business that is simply too vital for the U.S. government to slash
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coffers into these companies for decades to come... making right
now an ideal time to claim your stake. Get the names of these
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Disclosure: David Sterman does not own shares of any security
mentioned in this article.
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