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CACI International (CACI): Growing Niche Defense Contractor with a Checkered Past

November 09, 2011 | About:
CACI International is an IT and professional services company primarily serving the U.S. federal government and the Department of Defense. The company was founded in 1962 by two former RAND Corporation employees, Herb Karr and Harry Markowitz (who should be familiar to investors as the father of the efficient market hypothesis). Today the company is headquartered in Annandale, Va. and employs 13,700 people worldwide.

CACI provides enterprise IT and network services; data, information and knowledge management services; business systems solutions; logistics and materials readiness services; C4ISR solutions and services; cyber security; integrated security and intelligence solutions; and program management and system engineering and technical assistance (SETA) services.

The stock is lightly held by gurus with Dave Dreman devoting .8% of AUM, Joel Greenblatt .24% of AUM, and John Hussman .2% of AUM to the company.

Operating Results

In fiscal 2011 CACI earned $3.6 billion in revenue, of which 94.9% came from U.S. government prime contracts or sub contracts, 79.9% came from the Department of Defense and 15% came from civilian federal government agencies. Revenue came from domestic and international commercial customers, state governments, and local governments was 5.1%. The company’s primary international customers are large, UK-based corporations.

Margins

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As befitting a defense contractor CACI’s margins are largely determined by government policy. For fiscal 2011 39.8% of contracts were for time and materials, 35.7% for cost reimbursable, and 24.5% for firm fixed price. Contractors have the most opportunity to improve margins with fixed price contracts as better execution on the contractors part leads to increased profits. With cost plus type contracts margins are largely set. Encouragingly, fixed price contracts have been rising in both absolute dollar amounts and as a percent of revenues. In 2009 fixed price contracts accounts for $545 million or 19.9% of revenue compared to $877 million or 24.5% of revenue in 2011.

Returns on Assets and Capital

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Again, as a defense contractor CACI’s ROA and ROC are limited to average numbers.

Risks

Unlike most companies the biggest risk for CACI is not the economy. Only 5.1% of revenue comes from commercial or state and local governments which are revenue constrained. Reduced federal government spending, particularly reduced DoD spending is CACI’s biggest risk. The DoD base budget is expected to show modest low single digit growth over the next several years. Although, with the political shakeup likely with the 2012 elections this is almost a given to change.

Despite the calls for reducing federal government spending the DoD seems to get off the hook time and time again. For instance lawmakers (both Republican and Democrat) are now proposing several bills to exempt the DoD budget from any automatic cuts if the Congressional Super Committee can’t reach an agreement.

CACI also focuses on a niche (cyber warfare, IT services, C4ISR) that is very popular now within the DoD. Many services are cutting funding to other programs or line items and redeploying some of those savings to increasing funding on cyber warfare and network projects and programs. In fact in the company raised guidance for revenue (a very good sign), net income, and EPS after the first quarter 2012. Analysts are also expecting CACI’s revenue growth to outpace federal government budget growth.

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(Source: CACI presentation)

Potential investors may also want to consider CACI’s involvement in the 2004 Abu-Ghraib prison scandal before making a decision if they want to be a partial owner of the company.

From CACI’s 2011 10-K:

“In May 2004, press accounts disclosed an internal U.S. government report, the Taguba Report, which, among other things, alleged that one of our employees was involved in the alleged mistreatment of Iraqi prisoners at the Abu Ghraib facility. Another government report, the Jones/Fay Report, alleged that three of our employees, including the employee identified in the Taguba Report, acted improperly in performing their assigned duties in Iraq. The Jones/Fay Report included a recommendation that the information in the report regarding these employees be forwarded to the General Counsel of the U.S. Army for determination of whether each of them should be referred to the U.S. Department of Justice for prosecution and to the contracting officer for appropriate contractual action. Our investigation into these matters has not to date confirmed the allegations of abuse contained in either the Taguba Report or the Jones/Fay Report. To date, no charges have been brought by the government against us or any of our employees in connection with the Abu Ghraib allegations.”

The passage leaves out one important detail, although the passage states that no charges have been brought by the government it fails to mention that civil charges have been brought by prisoners and/or the family of prisoners held at Abu-Ghraib until the legal proceedings section of the 10-K. The United States Court of Appeals for the District of Columbia Circuit has already ruled in favor of CACI in one case but two other cases are pending. More detail can be found in CACI’s 2011 10-K under Item 3. Legal Proceedings.

Valuation

CACI appears on GuruFocus’ Low P/S Screener. CACI is no doubt cheap, as are most defense contractors.

Selected valuation ratios:

P/E (LTM) 11.2
Forward P/E 9.7
EV/EBITDA 7.61
P/Book 1.33
P/Cash Flow 8.6
P/Sales .47


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Disclosure: No position

About the author:

Ben Strubel
President and Portfolio Manager of Strubel Investment Management, LLC a value oriented, independent, fee-only Registered Investment Advisor (RIA) based in Lancaster, PA.

Visit Ben Strubel's Website


Rating: 2.9/5 (16 votes)

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