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6/11/2004
05:10 PM
William Schaff
William Schaff
Commentary
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Taking Stock: ManTech May Come Back From Its Dive

Some acquisitions aren't as integrated as management would like.

Clavadistas: These are the brave divers in Acapulco, Mexico, who jump off a 130-foot cliff. The dive must be timed perfectly to an incoming wave or the poor diver won't emerge. Quite a few stocks also dive, though this usually doesn't have anything to do with being brave but, rather, missing earnings or some other bit of bad news.

In May, ManTech International--which delivers IT, security, engineering, and other services, primarily to the Defense Department and other U.S. intelligence organizations--dove 31% when it said that profits wouldn't meet expectations. The stock is now down more than 23% since the beginning of the year. Will this clavadista rise from the depths again?

ManTech's services run from background checks on personnel desiring security clearances to deploying logistics systems for the Navy. Last year, its revenue was $701.6 million, up 40% from 2002. Most of this growth was due to acquisitions. It was one of these newly acquired companies, MSM Security Services, where the recent hiccup occurred.

MSM conducts background checks on government employees, and this service has been in high demand. MSM's contract was a fixed-price type, so as the scope increased because of higher volume and increased complexity, ManTech had no way to recover the additional costs. In addition, $11.3 million of revenue will shift from being recognized in the second quarter to the third. Thus, this contract has gone from being very profitable to being marginally profitable. Not good. The impact on the bottom line is a reduction of 20 cents per share in the second quarter and for the year. The First Call consensus estimate of earnings per share for 2004 became $1.17, down from $1.27--in other words, 2004 EPS growth is projected to be only about 6%. Not good, either. However, it appears to me that this issue is unique rather than a reflection of a systematic problem with pricing contracts.

That isn't to discount the risks associated with this company. ManTech revised its financial forecasts only a month after the regular earnings release, at which time it increased its revenue and earnings estimates for the year. This may indicate that some of the acquisitions perhaps are not as integrated into the company as management would like. Given ManTech's acquisitive nature, this could be a problem. Also, collection of the company's accounts receivables hasn't been stellar, with the number of days to collect increasing to 97.

Will this diver re-emerge? Internal growth for ManTech should be 12% to 13%, given the trends in IT spending by intelligence agencies. Add a couple of acquisitions, and soon revenue is growing at 20% per year, in my view. EPS is likely to grow 15% to 20%, assuming no margin expansion, I believe. Given the current estimates, the stock is trading at 16.3 times 2004 and 13.1 times 2005 EPS estimates, respectively. This is probably on the low end of what it deserves to trade at given its growth rate, and, I believe, there may be some room for appreciation. But as the divers on the Acapulco cliffs know: The risks never go away.

William Schaff is chief investment officer at Bay Isle Financial LLC, which manages the InformationWeek 100 Stock Index. Reach him at bschaff@bayisle.com. This article is provided for information purposes only and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security. Bay Isle has no affiliation with, nor does it receive compensation from, any of the companies mentioned above. Bay Isle's current client portfolios may own publicly traded securities in one or more of these companies at any given time.


To discuss this column with other readers, please visit William Schaff's forum on the Listening Post.

To find out more about William Schaff, please visit his page on the Listening Post.

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