In June 2020, CACI International Inc (CACI, Financial) won what may be its biggest contract ever: a $1.5 billion deal with the National Geospatial-Intelligence Agency (an arm of the U.S. Department of Defense) to supply its enterprise information technology, transport and cybersecurity services.
On July 27, it won another significant contract with the U.S. Air Force “to help U.S. forces integrate operations across all domains and against any adversary.” The contract, for which no dollar amount was provided, covers the domains of air, land, sea, space, cyber and electromagnetic spectrum. The goal is to help the Air Force develop its new Joint All Domain Command and Control.
What is this company? To put it simply, it is an IT company that specializes in the needs of governments for high tech solutions to current and emerging problems. Its competition includes IBM (IBM, Financial), Accenture (ACN, Financial) and Science Applications (SAI, Financial).
In its annual report for 2019, the company reported that Fortune magazine has recognized it as a “World’s Most Admired Company” eight times.
As a result of its growth, CACI's stock has been on a good run for much of the past 10 years:
Financial strength
The GuruFocus financial strength table shows a lot of orange and red, suggesting CACI has low financial strength.
However, its interest coverage ratio is greater than 6.0, meaning it has enough operating income to take care of its short-term interest expenses.
A significant chunk of capital has gone towards acquisitions, including four in 2019 alone. Those acquisitions have helped drive revenue increases:
The Piotroski F-Score of 4 indicates the company's financial situation is stable.
Finally, the company is earning positive returns on its capital. Its return on invested capital (ROIC) is about 1.4% greater than its weighted average cost of capital (WACC), indicating profitability.
Profitability
A look at the GuruFocus profitability chart reveals that the operating margin is good, both by the standards of the software industry and compared with its own history. Checking the latter, we see the operating margin has been in a relatively tight range over the past decade; its minimum operating margin was 6.19%, its median was 7.18% and its maximum was 7.94%.
The net margin also stayed within a relatively tight range, driving a return on equity (ROE) of 12.78%, which is better than two-thirds of its peers and competitors:
Over the past three years, CACI has robustly grown its revenue, Ebitda and earnings per share without NRI at averages of 9.2%,11.2% and 22% per year, respectively
President and CEO John Mengucci wrote earlier this year:
“CACI’s customer missions MUST continue. Our operations span the entire globe, serving some of the most important national security customers in the world. CACI’s balance sheet is strong with significant liquidity available, appropriate debt levels, and supported by robust cash flow generation to sustain future corporate strategic growth opportunities. Our long-term strategy remains intact… win new business, deliver operational excellence, and deploy capital for future growth.”
Valuation
Looking at the GuruFocus valuation chart, we see that over the past decade, CACI’s price-earnings ratio has varied between 7.00 and 26.48, while its median has been 14.67. Its current price-earnings ratio is 18.89, which is 29% above the median. When compared with the whole software industry, it looks relatively cheap:
According to the discounted cash flow (DCF) calculator, the company is not trading with a margin of safety. Despite the recent pullback, the CACI share price is still at a premium and likely too rich for most value investors.
There are no dividends from CACI, nor has it bought back more shares than it has issued.
Gurus
Just six gurus currently had positions in CACI at the end of the first quarter, and the trend in guru transactions has been to sell for the past few quarters.
The gurus who do have holdings don’t have large ones. At the end of Q1 2020, Jim Simons (Trades, Portfolio) of Renaissance Technologies had 51,600 shares after reducing his position by almost 29%. Jeremy Grantham (Trades, Portfolio) of GMO was going in the opposite direction. He added to his position by 125% and ended the quarter with 13,500 shares. Joel Greenblatt (Trades, Portfolio) of Gotham Asset Management reduced his position by 52.11% to end March with just 7,642 shares.
Conclusion
CACI International is a profitable company, one of the most profitable in its industry. Financial strength appeared to be more of a challenge, but the debt seems well covered by operational income and many new assets.
I think this stock is worth further consideration by growth investors since it has the means to continue on the fast track.
Value investors may take an interest in the stock if its valuation drops significantly. Owning a piece of a defense and cybersecurity firm augers well for investors who get in at the right price.
Disclosure: I do not own shares in any companies named in this article.
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