VSE Corporation was established in 1959 with a mission to provide engineering and technical support services to reduce the cost and improve the reliability of Department of Defense systems and equipment.
Today, VSE is a broadly diversified company focused on creating, sustaining, and improving the systems, equipment, and processes of government through core competencies in legacy systems sustainment, obsolescence management, prototyping, reverse engineering, technology insertion, supply chain management, foreign military sales, management consulting, and process improvement. Their expanded mission now includes providing innovative services and technologies to help customers succeed in the engineering, energy, environment, information technology, and defense services markets.
VSE Corp. [NASDAQ: VSEC- $35] has been ranked among the top 100 defense contractors, top 10 foreign military sales contractors, and top 50 Navy contractors in the nation.
VSEC has experienced tremendous growth over the past decade. EPS surged from a split-adjusted $0.15 in 2002 to peak at $4.67 in 2009. Their shares reflected that progress moving from $2.51 in 2002 to a 2007 high of $63.
Here are the per share numbers as reported by Value Line:
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 |
2009 | 196.25 | 6.12 | 4.67 | 0.20 | 19.60 | 7.0x |
The dividend was just raised 20% again going from $0.05 to $0.06 quarterly. There is plenty of room for future increases as the payout ratio is under 6% of projected 2010 earnings.
At this afternoon’s quote of $35 VSEC trades at just 8.3x estimated earnings for this year. That’s well below the 11.25x average multiple from 2003 through 2009. Be aware too that the average P/E was artificially depressed by the super low multiples in 2008 – 2009 when the whole market was in the toilet. A rebound to even 11x this year’s $4.23 consensus view would bring these shares back up to $46.53 or up 33% by year-end.
Is that a reasonable target price? VSEC touched a January high of $54 this year and peaked at $63.00, $49.69 and $49.00 in 2007-2008-2009 respectively. If anything, my goal price is probably too conservative.
VSEC has no debt – short or long term and held over $2.2 million in cash as of March 31, 2010. There is no defined benefit pension plan. With only a little over 5 million shares outstanding it shouldn’t take too much buying interest to move these shares up rapidly.
Dr. Paul Price
www.BeatingBuffett.com
June 9, 2010
Disclosure: Author is long VSEC shares.
