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The Tech Stock That Uncle Sam Can't Live Without

By: StreetAuthority
Posted: 8/20/2014 2:30:00 PM
Referenced Stocks: EGOV

Many stocks these days seem to live and die by their most recent quarterly results.

What if I said I found a stock whose customers are virtually guaranteed not to go out of business, a client that will be around forever?

What's more, the customers are likely to generate more revenues every year no matter what, and the more the client grows, which it seems to always be growing, the more the stock naturally benefits.

If the stock sounds too good to be true, it's not. If it sounds like the government, you're getting warm.

NIC, Inc. (Nasdaq: EGOV ) is a long established company that provides services to local, state and federal government agencies. Specifically, it builds and maintains official websites, online services and secure payment processing solutions for more than 3,500 government customers in 29 states across the United States.

The United States government tends not to get smaller from year to year. Even in the maw of the Great Recession, in most cases, it was only the rate of growth in government spending that declined, not the level of spending itself. And, now that the recession is over, business is booming.

NIC is ranked No. 20 on Forbes list of the "25 Fastest Growing Tech Companies in America," and is a member of the S&P SmallCap 600 Index. Its revenues have grown from $56 million in 2004 to $249 million last year. The company has a reliable net gain of government clients each year.

The firm maintains ecommerce functions for everything from state motor vehicle registrations to hunting licenses. And it does a good job of it - NIC securely processes more than $22 billion in payments for government agencies annually.
NIC's business is focused mainly around state and local government agencies, with a few inroads at the federal level -- most notably, the U.S. Department of Transportation. NIC already has contracts with 29 state governments, so new business on the state level could dry up to some degree in the coming years.

But there are still plenty of greenfield opportunities ahead for NIC.

The company aims to earn contracts with federal agencies -- primarily virgin territory with very large potential -- and has received requests from foreign governments to provide e-government services, said CEO Harry Herington during the Q2 conference call on August 7.

With a market cap of $1.24 billion, NIC is regarded a small-cap stock, with healthy institutional sponsorship of 80.6 percent of shares. Liquidity is fairly low, however, at about 300,000 shares traded daily.

EGOV is not an inexpensive stock. It sports a 39.5 price-to-earnings ratio versus the S&P 500's P/E of 19.4. But industry wide, the average P/E for the Internet software & services category where NIC resides is an even loftier 44.26.

There are no signs that point to a hiccup in EGOV's future working with governments. Revenues are up 350 percent over the past 9 years. Profit margins are consistent and the company has no debt.

NIC is even able to brag that it decreased government spending. For instance, the Utah.gov website it devised for Utah's state government makes more than 600 services available online even when the state offices are closed. This upgrade has reduced previous labor costs by more than $4 million.

Also, this creative company created something it calls the "self-funded" approach that helps build e-government products without requiring tax appropriations.

With this approach, governments in 23 states charge a transaction fee (in addition to any required statutory fees) for users of some of their NIC web sites or related services. That way, the government agencies get the websites or related services from NIC for practically nothing upfront, the NIC contract charges are reimbursed from the transaction fees and the costs are borne directly by corporate or individual taxpayers who use the web sites.

Risks To Consider: A rival service provider may try to erode NIC's market share. None appear to be on the horizon but any firm with the right backing could rise quickly. In the event of a concerted cyber-war, NIC could be a target, but so far the company has managed to avoid significant damage from hackers.

Actions To Take --> Go long NIC Inc. ( EGOV ). The company is a medium-to-long term buy given its reliable base of revenues and earnings.

NIC is not the only company with lucrative contracts with the United States government . In the most recent issued of High-Yield Investing, my colleague, Nathan Slaughter, profiled a firm with Uncle Sam as its main client and a dividend yield of 7.4%... and that stock is just the tip of the iceberg. For more information about High-Yield Investing -- and the name and ticker symbol of the other government-backed stock -- click here .