NDQ: VSEC - Sep. 1, 2009: $33.30
52-week range: $19.51 - $48.44
Dividend = 0.05 quarterly = 0.6% current yield
VSE performs engineering services, primarily for agencies of the U.S. government. The company's services include program planning, prototype development, electronic-warfare software support, logistics management, and configuration-management support and maintenance. These services are used for such projects as modernizing military vehicles, analyzing the conditions of machinery, and developing training aids for air-launched missile systems. VSE has provided more than $2 billion in diversified engineering and technical support services to the U.S. Government. VSE has been ranked among the top 100 defense contractors, top 10 foreign military sales contractors, and top 50 Navy contractors in the nation. The U.S. Department of Energy and the U.S. Department of the Treasury also contract for VSEC’s services.
2009 marks the 50th year of service for VSEC.
The United States Military branches and other government agencies are among the few consistently growing areas of America’s economy. That puts VSEC in a sweet spot that has resulted in many years of sustained revenue and earnings improvements. While the shares have somewhat reflected the excellent fundamentals, VSE Corporation is an underfollowed and largely unknown company to most investors.
In today’s market this appears to be a spectacular bargain that is flying “under the radar” at the moment. An interesting tidbit to note here was that VSEC’s 52-week high and low were both set just 12 days apart. The trough price of $19.51 was hit intra-day on January 9th while the peak price of $48.44 followed shortly afterwards at $48.44 on January 21st.
Was there any news to account for those crazy price swings? Yes and no. The low simply reflected the panicky market of early January while the high came after the company reported all-time highs for both the fourth quarter and full-year earnings.
2009 is well on track to be the seventh consecutive year of higher sales and earnings. Growth has been spectacular since 2002. Here are the (split-adjusted) per share numbers of those past seven years:
Year ..... Sales ...... C/F ...... EPS ...... Div....... B/V ...... Avg. P/E
2002 .... 30.74 .... 0.47 .... 0.15 ..... 0.08 .... 3.90 ....... 26.1x
2003 .... 30.36 .... 0.72 .... 0.45 ..... 0.08 .... 4.30 ....... 12.9x
2004 .... 47.44 .... 1.04 .... 0.75 ..... 0.10 .... 5.06 ....... 13.5x
2005 .... 59.36 .... 1.61 .... 1.29 ..... 0.12 .... 6.39 ....... 12.2x
2006 .... 75.97 .... 2.02 .... 1.61 ..... 0.14 .... 7.99 ....... 11.2x
2007 ... 129.28 ... 3.48 .... 2.82 ..... 0.16 ....11.16 ...... 13.3x
2008 ... 204.71 ... 4.80 .... 3.74 ..... 0.18 ....14.93 ....... 8.7x
First half 2009 has continued the great results. In the six months ended June 30th VSEC earned $2.16 versus $1.65 (+ 30.9% year-over-year). Trailing 12-month EPS are now $4.25/share up from calendar 2008’s $3.74/share.
The company has paid dividends each year since 1973 and the rate was increased in every year since 2004 including 2009. The balance sheet is beautiful with just $2.6 million in total debt representing less than 1% of capitalization. There is no pension liability and there are no preferred shares. Standard and Poors gives VSE Corp. a quality rating of A- and Value Line rates their financial strength as B+. Both those scores are quite good for a small-cap company.
Based on today’s closing quote of $33.30 the multiple is under 7.9x trailing earnings. A rebound to (a still lower than typical) 12 times P/E, would bring VSE’s shares back to $50.88 or + 52.8% above today’s price.
Is that a crazy target for VSEC? Nope. These shares hit a peak of $63.00 in 2007 on earnings of $2.82 /share and touched $49.69 and $48.44 in 2008 and 2009 even with the dire market conditions.
Long-term holders have been well rewarded. EPS have grown from $0.15 in 2002 to today’s $4.25 and the shares have surged from $2.51 to $33.30 – even at their currently depressed valuation. In the past five years, when most stocks showed poor total returns, VSEC’s holders more than quadrupled their money.
Where else can you find a good-quality, growth stock making all-time highs on all fundamental metrics, at under 8 times last year’s earnings? If you know of some please share them with me.
VSEC’s web-site provides anecdotal evidence of how strong their business is right now. In a world where almost 10% of Americans are unemployed, their web-site reads… “VSE IS HIRING: VSE is anticipating ongoing requirements to staff up rapidly in a number of maintenance and supply specialties at overseas sites in support of the U.S. Army Preposition Stock (APS-5) and Direct Theater Support (DTS) Missions.”
Summary:
VSE Corp. has shown eight consecutive years of tremendous growth, and deals with the most creditworthy customer of all – the U.S. Government. They have a pristine balance sheet, a small but growing dividend and they continue to post record earnings despite today’s poor economic conditions. VSEC shares now trade for just 53% of their 2006 high even though EPS have advanced by over 50% since then. This fine growth company sells for just 7.8x trailing earnings – its lowest multiple in more than 10 years.
A normalized P/E of 13 would bring these shares back up to $55.25 based on actual trailing earnings of $4.25 /share. VSE Corporation could easily return 50% or more very quickly, just on a change in mood.
Its long-term prospects look excellent for much more than that.
Disclosure: Author is long VSEC shares.
