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CACI International Poised for Growth Despite Inherent Risks

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On Jun 6, we updated the research report on information technology services provider, CACI International Inc. (CACI - Free Report) .

Based in Arlington, VA, CACI International delivers IT applications and infrastructure to improve communications and secure the integrity of information systems and networks, enhance data collection and analysis, and increase efficiency and mission effectiveness. Over the years, the company has provided support services to the U.S. federal forces.  

CACI International intends to drive operational excellence by intensively focusing on its organic and inorganic growth strategy and strengthening its existing customer relationships while building newer ones. The company further anticipates to significantly benefit from its cost-reduction program. CACI International also remains focused on its strategy to grow in larger markets, drive operational excellence, and leverage mergers and acquisitions to increase its market share and create long-term value for its shareholders. The strategic partnership with Appcelerator – a provider of leading mobile engagement platform – will likely augment its position in the market. The deal combines CACI International’s automated security testing, compliance testing and vulnerability detection capabilities with Appcelerator’s comprehensive platform for creating, delivering, and analyzing mobile applications. This enables customers to quickly deploy mobile applications at a lower cost and a higher return on investment (ROI).

In addition, CACI International has a large pipeline of new projects and continues to win more deals at regular intervals. These back-to-back contract wins are the key catalysts to the company’s success. Furthermore, having the government as a big client lends stability to the business and moderates fluctuations in revenues. Although the government’s approval process is usually lengthy, the project continues earning money even years after it has been approved. Moreover, government contracts improve the visibility of future revenue streams. We believe the company is comfortably positioned, given its favored relationship with the Department of Defense. Cyber attacks are also creating increased awareness, leading to a heightened demand for cyber solutions. From 2009 to 2016, the company’s revenues increased at a CAGR of 4.03%.

However, CACI International has underperformed the Zacks categorized Computer Services industry in the last three months with an average return of 0.6% compared with 9.4% gain for the latter. Earnings estimates for the current quarter fell to $1.65 per share from $1.75 during this period, representing bearish investor sentiments. We believe that the cautious investor sentiment is primarily due to the perceived uncertainty around the new administration’s policies compared to the predecessor.

Evolving rules and regulations remain a significant impediment to margin growth. CACI International derives a significant portion of its revenues from the U.S. federal government as either a prime contractor or a subcontractor. These contracts are subject to extensive legal and regulatory hurdles, which are stringent and subject to change. The government also investigates operations periodically to ensure that the terms and conditions have been properly adhered to. Deviations from the terms laid out by the government may result in huge penalties or termination.

Nevertheless, we expect this Zacks Rank #3 (Hold) stock to ride out the storm with relatively healthy growth dynamics. Some better-ranked stocks in the industry include ManTech International Corporation (MANT - Free Report) , Mattersight Corporation and NCI, Inc. , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

ManTech has a long-term earnings growth expectation of 8%. It has beaten earnings estimates thrice in the trailing four quarters with an average positive earnings surprise of 7.9%.

Mattersight has healthy long-term earnings growth expectation of 25%.

NCI has a long-term earnings growth expectation of 5%. It has beaten estimates thrice in the trailing four quarters with an average positive earnings surprise of 9.6%.

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