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 Dyncorp (NYSE:DCP), a key government contractor in Iraq. Shares have fallen from over $20 last summer to a recent $11. But things are beginning to look up...
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.