ManTech International Corporation (MANT, Financial) is a leading provider of innovative technologies and solutions for mission-critical national security programs for the intelligence community; the Department of Defense, including its health organizations; the departments of State, Homeland Security, Energy and Justice, including the Federal Bureau of Investigation (FBI); the space community; and other U.S. federal government customers. It provides support to critical national security programs for approximately 60 federal agencies through approximately 1,000 current contracts. MANT's expertise includes command, control, communications, computers, intelligence, surveillance and reconnaissance lifecycle support; cyber security; global logistics support; intelligence/counter-intelligence support; information technology modernization and sustainment; systems engineering; test and evaluation; and health IT.
Valuation
MANT is currently trading at a trailing 12 months P/E of 8.79 and a trailing 12 months EV/EBITDA of 3.55. MANT's current P/E valuation represents a new 10-year historical low. MANT achieved a five-year average ROE of 13.93% and a five-year book value per share CAGR of 17.02%.
Financial and Business Risks
MANT is in a net cash financial position with net cash of $8.9 million representing less than 1% of its current market capitalization of $972 million. This does not include off-balance sheet liabilities such as operating leases amounting to $227 million. MANT leases office space and equipment under long-term operating leases.
MANT's primary customer is the U.S. federal government.
While the U.S. federal government spent about $266 billion on contracted services in 2011, growth in federal spending is expected to be muted given the nation's debt level.
Many U.S. federal government customers purchase goods and services through multiple award contracts, because of budgetary pressures and reforms in the procurement process. MANT is required to make sustained efforts to compete for post-award orders.
About 15% of MANT's business is fixed-price contracts, where it performs specific tasks for a fixed price. Compared with time-and-material contracts and cost-plus contracts, fixed-price contracts offer MANT higher margin opportunities, but involve greater financial risk of cost overruns.
The drop in gross margin from 18.8% in 2003 to 14.5% in 2011 may reflect an increased use by the federal government of a lowest price/technically acceptable standard for contract awards and increased costs incurred through the competitive bidding process.
Business Quality and Capital Allocation
MANT derived 85.6% of revenue as a prime contractor in 2011, compared to 75.9% and 64.8% in 2010 and 2009 respectively.The prime contractor position is increasingly important, as it allows MANT to enhance relationship with customers, foresee emerging requirements and manage project resources. In 2011, MANT secured prime positions on the $6.6 billion Defense Intelligence Agency (DIA) Solutions for Information Technology Enterprise (SITE) contract and the $12.0 billion DISA ENCORE II contract.
MANT is well positioned in growth segments of the market such as full-spectrum cyber and intelligence. Given the attention from high-profile cyber attacks, the cyber security market will remain robust. MANT is a recognized cyber leader with a established cyber practice since 2002. In the area of intelligence/counter-intelligence solutions and support, there are significant barriers to entry such as security clearance requirements and specialized skills.
MANT generated positive free cash flow in 9 out of the past 10 years and free cash flow typically exceeding 1.2 times of net income. MANT's 10-year revenue CAGR of 20.86% is primarily driven by organic growth in cyber, intelligence and systems engineering, and 19 successful acquisitions since its IPO. However, do take note that the free cash flow does not take into cash spent on acquisitions.
MANT only initiated a regular cash dividend program in May 2011 with a current dividend yield of 3.35% and a corresponding dividend payout ratio of 22%
Conclusion
A one-trick pony and risky acquisition-driven growth weigh heavily on the stock. However, a historical low P/E of 8.79, a dividend yield of 3.35% and a net cash financial position makes MANT a worthy candidate for consideration.
Disclosure
The author does not have a position in any of the stocks mentioned.
Valuation
MANT is currently trading at a trailing 12 months P/E of 8.79 and a trailing 12 months EV/EBITDA of 3.55. MANT's current P/E valuation represents a new 10-year historical low. MANT achieved a five-year average ROE of 13.93% and a five-year book value per share CAGR of 17.02%.
Financial and Business Risks
MANT is in a net cash financial position with net cash of $8.9 million representing less than 1% of its current market capitalization of $972 million. This does not include off-balance sheet liabilities such as operating leases amounting to $227 million. MANT leases office space and equipment under long-term operating leases.
MANT's primary customer is the U.S. federal government.
While the U.S. federal government spent about $266 billion on contracted services in 2011, growth in federal spending is expected to be muted given the nation's debt level.
Many U.S. federal government customers purchase goods and services through multiple award contracts, because of budgetary pressures and reforms in the procurement process. MANT is required to make sustained efforts to compete for post-award orders.
About 15% of MANT's business is fixed-price contracts, where it performs specific tasks for a fixed price. Compared with time-and-material contracts and cost-plus contracts, fixed-price contracts offer MANT higher margin opportunities, but involve greater financial risk of cost overruns.
The drop in gross margin from 18.8% in 2003 to 14.5% in 2011 may reflect an increased use by the federal government of a lowest price/technically acceptable standard for contract awards and increased costs incurred through the competitive bidding process.
Business Quality and Capital Allocation
MANT derived 85.6% of revenue as a prime contractor in 2011, compared to 75.9% and 64.8% in 2010 and 2009 respectively.The prime contractor position is increasingly important, as it allows MANT to enhance relationship with customers, foresee emerging requirements and manage project resources. In 2011, MANT secured prime positions on the $6.6 billion Defense Intelligence Agency (DIA) Solutions for Information Technology Enterprise (SITE) contract and the $12.0 billion DISA ENCORE II contract.
MANT is well positioned in growth segments of the market such as full-spectrum cyber and intelligence. Given the attention from high-profile cyber attacks, the cyber security market will remain robust. MANT is a recognized cyber leader with a established cyber practice since 2002. In the area of intelligence/counter-intelligence solutions and support, there are significant barriers to entry such as security clearance requirements and specialized skills.
MANT generated positive free cash flow in 9 out of the past 10 years and free cash flow typically exceeding 1.2 times of net income. MANT's 10-year revenue CAGR of 20.86% is primarily driven by organic growth in cyber, intelligence and systems engineering, and 19 successful acquisitions since its IPO. However, do take note that the free cash flow does not take into cash spent on acquisitions.
MANT only initiated a regular cash dividend program in May 2011 with a current dividend yield of 3.35% and a corresponding dividend payout ratio of 22%
Conclusion
A one-trick pony and risky acquisition-driven growth weigh heavily on the stock. However, a historical low P/E of 8.79, a dividend yield of 3.35% and a net cash financial position makes MANT a worthy candidate for consideration.
Disclosure
The author does not have a position in any of the stocks mentioned.
