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CACI - Growth at a Ridiculously Low Price

April 04, 2012 | About:
For 50 years CACI International Inc. (CACI) has been serving America by providing in-demand services and solutions for our most vital missions for defense, intelligence, homeland security and IT government modernization. Moreover, the company has consistently outgrown the government’s defense budget because of its emphasis on higher growth areas of government services needed to defend our country. Also, because of the sensitive nature of the services that are provided through contracts ranging from three to five years, we believe the company possesses a very strong moat. The majority of CACI’s employees hold high-security clearances that provide natural barriers to entry against outsiders attempting to impinge on their turf.

CACI has a long history of growing earnings in excess of 18% per annum and produces prodigious amounts of free cash flow. Nevertheless, it appears that fears of a shrinking defense budget have driven their shares to valuations that are unprecedentedly low historically. Consequently, we believe this high-quality defense company with a niche offers a good opportunity for investors seeking high growth at a reasonably low level of risk. We believe the company is well positioned to continue to grow future earnings at an above-average rate. Consequently, we see several opportunities for profit. Organic growth should continue at a mid-teens compounded annual rate, the company’s ample cash flows position it for strategic acquisitions and a price earnings ratio expansion from its current PE of 11 to a more normal PE of 18 to 20 is reasonable to expect as investors’ anxiety over defense cuts diminish.

Growth Stocks Defined

Growth stocks are defined as companies with high rates of change of earnings growth of 15% to 20% or better. Growth stocks offer the potential for share prices to rise in lockstep with their profit growth in the long run. Therefore, the PEG ratio formula (price equals growth rate) tends to be the most appropriate formula used to value growth stocks. However, due to the exponential nature of compounding large numbers, PEG ratio forecasts are capped at 40%.

Because of the higher valuation typically awarded to fast growth, growth stocks offer the potential for greater capital appreciation. On the other hand, they also offer higher risk. First of all, they tend to command much higher than average PE ratios, and second, achieving very high levels of growth is very difficult to sustain. Consequently, forecasting future earnings growth is more important with high-growth stocks than any other class of stock. Also, the average growth stock typically plows all of its profits back into the company to fund its future growth, instead of paying dividends.

CACI International Inc. (CACI): Large-cap Growth at an Attractive Price

About CACI International Inc: Directly from their website"

Celebrating our 50th year in business, CACI sustains an exceptional record of success by providing professional services and IT solutions needed to prevail in the areas of defense, intelligence, homeland security, and IT modernization and government transformation. We deliver enterprise IT and network services; data, information, and knowledge management services; business system solutions; logistics and material readiness; C4ISR solutions; cyber solutions; integrated security and intelligence solutions; and program management and SETA support services. CACI solutions help federal clients provide for national security, improve communications and collaboration, secure information systems and networks, enhance data collection and analysis, and increase efficiency and mission effectiveness. A member of the Fortune 1000 Largest Companies and the Russell 2000 index, CACI provides dynamic careers for approximately 14,400 employees working in over 120 offices in the U.S. and Europe.


Earnings Determine Market Price: The following earnings and price correlated F.A.S.T. Graphs™ clearly illustrates the importance of earnings. The Earnings Growth Rate Line or True Worth™ Line (orange line with white triangles) is correlated with the historical stock price line. On graph after graph the lines will move in tandem. If the stock price strays away from the earnings line (over or under), inevitably it will come back to earnings.

Click on this link for a LIVE and fully functioning graph on CACI International. We suggest running graphs over numerous time frames as part of a more comprehensive fundamental analysis.

CACI International Inc.: Historical Earnings, Price, Dividends and Normal PE Since 1998

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Performance Table CACI International Inc.

The Two Keys to Long-Term Performance

Years of research and experience have taught us that there are two critically important keys to achieving above-average, long-term shareholder returns at reasonably controlled levels of risk. The first key is earnings growth, or what we like to call the rate of change of earnings growth. The faster a company can grow its business (i.e., earnings), the larger the income stream it can produce with which to reward shareholders. This is because of the power of compounding, which Albert Einstein was alleged to have called "the most powerful force on earth." Ultimately, both capital appreciation and dividend income will be a function of a company's ability to grow its profits.

The second key is valuation. When a company can be purchased at its intrinsic value based on earnings and cash flow generation, the shareholders' rate of return or long-term capital appreciation will inevitably correlate to and/or equal its earnings growth rate. Overvaluation will lower that rate of return and conversely, undervaluation will increase it. Consequently, paying strict attention to the valuation you pay to buy a stock is a critical component of both greater return and taking lower risk to achieve it. Because, ironically, when you overpay for even the best business, you simultaneously lower your return potential while increasing your risk of achieving the lower return.

The associated performance results with the earnings and price correlated graph, validates the above discussion regarding the two keys to long-term performance. Notice the impact that valuation (black line above or below orange earnings justified valuation line) had on the following performance results.

CACI%202.png

The following graph plots the historically normal PE ratio (the dark blue line) correlated with 10-year Treasury note interest. Notice that the current price earnings ratio on this quality company is as low as it has been since 1998.

CACI%203.png

A further indication of valuation can be seen by examining a company’s current price to sales ratio relative to its historical price to sales ratio. The current price to sales ratio for CACI International Inc. is .44 which is historically low.

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Looking to the Future

Extensive research has provided a preponderance of conclusive evidence that future long-term returns are a function of two critical determinants:

1. The rate of change (growth rate) of the company’s earnings

2. The price or valuation you pay to buy those earnings

Forecasting future earnings growth, bought at sound valuations, is the key to safe, sound and profitable performance.

Therefore, it logically follows that measuring performance without simultaneously measuring valuation is a job half done. CACI International Inc. is clearly an industry-leading superior business, which based on the consensus estimates from leading analysts, appears to be capable of growing earnings at an above-average rate for the foreseeable future. At its current price, which is attractively aligned with its True Worth™ valuation, CACI International Inc. represents an opportunity for growth at a reasonable price. The important factor is that CACI International Inc., with its strong balance sheet and potential for future earnings growth, has real assets and cash flow underpinning its stock price. This solid economic foundation offers shareholders the potential for both a strong margin of safety and an opportunity for outsized future returns.

The Estimated Earnings and Return Calculator Tool is a simple yet powerful resource that empowers the user to calculate and run various investing scenarios that generate precise rate of return potentialities. Thinking the investment through to its logical conclusion is an important component towards making sound and prudent commonsense investing decisions.

The Estimated Earnings and Return Calculator on CACI is based on its five-year average historical earnings growth rate of 18.1%. CACI International Inc has low long-term debt at 24% of capital. CACI International Inc is currently trading at a P/E of 11.1, which is below the value corridor (defined by the five orange lines) of a maximum P/E of 21.7. If the earnings materialize as forecast, CACI International Inc.’s True Worth™ valuation would be $218.31 at the end of 2017, which would be a 27% annual rate of return from the current price.

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Earnings Yield Estimates

Discounted Future Cash Flows: All companies derive their value from the future cash flows (earnings) they are capable of generating for their stake holders over time. Therefore, because Earnings Determine Market Price in the long run, we expect the future earnings of a company to justify the price we pay.

Since all investments potentially compete with all other investments, it is useful to compare investing in any prospective company to that of a comparable investment in low-risk Treasury bonds. Comparing an investment in CACI International Inc. to an equal investment in 10-year Treasury bonds, illustrates that CACI International Inc.’s expected earnings would be 8.8 times that of the 10-year T-Bond Interest. (See EYE chart below.) This is the essence of the importance of proper valuation as a critical investing component.

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Summary & Conclusions

This report presented essential “fundamentals at a glance” illustrating the past and present valuation based on earnings achievements as reported. Future forecasts for earnings growth are based on the consensus of leading analysts. Although, with just a quick glance you can know a lot about the company, it’s imperative that the reader conducts their own due diligence in order to validate whether the consensus estimates seem reasonable or not.

We believe that CACI is an extremely high-quality defense company with a niche that is currently being unfairly discounted by “Mr. Market.” The company possesses a predictable and consistent opportunity for continued double-digit earnings growth that is significantly in excess of the average company. Nevertheless, it can currently be purchased at a significant discount to the average company. This company pays no dividends; it is purely an opportunity for growth that can currently be purchased at a significant discount to its True Worth™. Therefore, we suggest that investors seeking high growth at a reasonable level of risk should dig deeper into this high-quality growth opportunity currently on sale.

Disclosure: Long CACI at the time of writing.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment adviser as to the suitability of such investments for his specific situation.

About the author:

FAST Graphs
F.A.S.T. Graphs™ is a powerful research tool providing "essential fundamentals at a glance" on over 17,000 symbols. F.A.S.T. Graphs™ empowers the user to research stocks deeper and faster by allowing them to exploit the undeniable relationship and functional correlation between long-term earnings growth and market price. Warren Buffett, the greatest capital allocator of all time, said; "there are only two things that investor needs to know; how to value a company and how to think about stock prices." With the F.A.S.T. Graphs™ at their disposal, users are able to perform both of these critical tasks... FAST.

F.A.S.T. is an acronym for Fundamentals Analyzer Software Tool that takes all the hours of manual graphing of business fundamentals and reduces it to seconds, giving you critical information in an instant. With one glance you know a lot about the business you are graphing and its past, present and future value. F.A.S.T. Graphs™ should be the first step in every research project. Each graph is worth 1,000 words in describing a company's growth, consistency and valuation.

Visit FAST Graphs's Website


Rating: 3.5/5 (13 votes)

Comments

davidchulak
Davidchulak premium member - 2 years ago
Great article and a great stock. Interestingly enough, I was going to write about CACI tonight. Greenblatt....one of my favorites....has taken notice. As a side note as far as gurus....if any of you follow the low P/E style of the former Windsor Fund Mangager, John Neff, this stock scores very high.

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tonyg34
Tonyg34 - 2 years ago
call me a dummy

but I just don't see any pricing power or competitive advantages in the IT space. There is no service that CACI provides that could not be handled by SAIC or CSC, Also, this space is being encroached upon by NOC and GD as they expand their product offerings.

I think there are other DoD contractors with more obvious competitive advantages like HRS, DGI . You stated that security clearances give CACI an advantage in bidding but SAIC has more cleared contractors and getting cleared as a contractor isn't as hard as you would like to think (I used to work for HRS, currently work for state dept)

The gov't changes IT providers far more often and more easily than they can change vendors for fighter jets

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