Sector Watch: Business software stocks
With the advent of software and the Internet, the world may seem as if it’s getting tinier by the day, but no matter how small it is, the market to protect it is still vast. This plays perfectly into software and systems providers Integral Systems, Inc. (Nasdaq:ISYS) and ManTech International Corporation (Nasdaq:MANT).
Both ManTech and Integral, purveyors of software for satellite, defense and homeland security applications, are well-positioned to capitalize on government IT spending, which is forecast to grow 29% to $102 billion by 2012 from $79 billion in 2007. Another trend supporting IT market growth is the impending shortage of government IT workers. Federal IT outsourcing spending is projected to grow to $18 billion in 2011 from $13 billion in 2006. Recent government contract awards include a $124 million State Department contract for its global IT modernization program and a $151 million Navy IT contract. Both contracts were awarded in July.
Integral.builds satellite ground systems and equipment for command and control, data processing and simulation. The company has provided ground systems for over 200 different satellite missions for communications, science and meteorology. Its customers include government and commercial satellite operators, spacecraft and payload manufacturers and aerospace systems integrators. Integral was the first to offer commercial, off-the-shelf software for satellite command and control, enabling its customers to avoid the high cost and development risk of traditional, custom-built satellite ground systems. The company’s EPOCH software is the world leader in commercial applications and has been successfully installed on five continents.
A key growth driver of Integral’s business is demand for satellite bandwidth. Industry analysts forecast government and military demand for commercial satellite bandwidth will continue to rise through 2015 and look for 43% growth in in-service units to 557,200 by 2012 from 388,900 in 2008.
Integral has enjoyed 18% annual revenue growth and 20% annual earnings growth since 2001. In 2008, demand for its services from the U.S. Air Force and other government agencies has pushed growth rates higher. The company’s revenues rose 34% year over year in the first nine months of FY 2008 to $123.9 million from $92.3 million in the same period last year. Net earnings for the nine-month FY 2008 period rose 96% year over year to $15.7 million from $8 million and per-share earnings increased 143% year over year to $1.75 from $0.72, reflecting the positive impact of share repurchases. Integral Systems anticipates full-year 2008 revenues will exceed $150 million and the company recently raised its per-share earnings guidance to $2.15 from $1.90. Revenues and per-share earnings last year were $128.7 million and $1.17, respectively. The company’s earnings have exceeded analyst forecasts by double- and triple-digit amounts in the past four quarters. Analysts think Integral Systems will produce 20% annual growth over the next five years. My $60 price target for Integral shares is 20% above its closing price of $50 on Tuesday.
ManTech International Corporation provides systems engineering, software development and related services to U.S. federal agencies including the departments of Defense, State, Homeland Security and Justice. It also provides services to NASA and the Patent and Trademark Office, as well as to state and local government and commercial customers. ManTech operates in 40 countries and employs some 7,300 skilled workers. Of these, approximately 41% hold the top secret level clearance necessary for classified contracts. ManTech supports telecommunication systems used by the U.S. military in Iraqi and other countries, created a secure communications system for Homeland Security, and built and maintains a database for tracking terrorists. Approximately 93% of the company’s revenues are derived from defense and intelligence community contracts.
BusinessWeek recognized ManTech as one of the best-performing, fastest-growing tech companies in 2007 and 2008.
ManTech’s revenues rose 38% year over year during the first six months of 2008 to $890 million from $643 million, and net income improved 47% year over year to $1.8 million, or $1.21 per share, from $28.4 million, or $0.84 per share. The company was awarded new contracts worth $600 million in the 2008 second quarter and ended the quarter with contract backlog of $3.44 billion, including funded backlog of $989 million, up 33% from funded backlog of $746 million one year ago. Consistent with these strong results, ManTech has revised its full-year 2008 guidance upward. It now targets 2008 revenues of $1.85 billion to $1.89 billion, up 28% from $1.45 billion last year, and per-share earnings of $2.46 to $2.53, up 39% from $1.77 last year. Analysts anticipate 29% growth this year and 15% annual growth over the next five years. My $68 price target for ManTech is 14% higher than Tuesday’s closing price of $59.65.
Other business software firms that analysts predict will produce strong earnings gains include Ebix (Nasdaq:EBIX) and ArcSight, Inc. (Nasdaq:ARST). Ebix provides software and e-commerce solutions for the insurance industry. Its products range from carrier systems, agency systems and exchanges to custom software. ArcSight designs compliance and security management software and systems for government agencies. Its proprietary platform correlates user activity and data so that businesses can quickly identify compliance violations and cyber-threats.
About the Author
Contributing author Lisa Springer is an equity research analyst with nearly 20 years of investment research experience.
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