Stanley Inc.: Growing better with age

Jennifer Schonberger | Sep 29, 2008 6:20am EDT | Comment

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Much like a fine wine, Stanley, Inc.’s (NYSE:SXE) results are purported to become better with age. Bolstered by a rock-solid backlog, a synergistic acquisition and continued organic growth, the provider of IT services to U.S. defense and federal civilian government agencies has a strong outlook.

Stanley’s backlog is robust with 90% of forecasted revenues already in the books. Continued support for the Space and Naval Warfare Systems Center in Charleston, S.C. is one of the company’s latest and largest contracts that could translate to $249.88 million in proceeds should options and terms materialize.

Aside from organic growth, Stanley acquired Oberon Associates in June for $170 million. The company, which provides engineering, operational intelligence and IT services, expands Stanley's customer base to include the U.S. Army, U.S. Air Force, Defense Information Systems Agency, and several other agencies throughout the intelligence community.

Wachovia analyst Edward Caso expects the Oberon acquisition to add $0.01 to $0.02 to earnings in 2009 and purports the acquisition will be more accretive in 2010, as it adds higher margin intelligence capabilities to Stanley’s service offerings. “Stanley continues to be the fastest (organically) growing government services provider by far,” Caso wrote in a research note on August 1. “We believe estimates will continue to drift upward as the company rationalizes the competitive synergies from Oberon, and improves efficiencies on key outsourcing contracts.”

Cowen analyst Cai von Rumohr is forecasting earnings growth of 20% or greater into 2010 from the Oberon acquisition, a strong first quarter ended June 27, 2008 and a purported growing number of contract wins. A new ramp in passport demand, expected mostly in the fourth quarter, will also fuel results. Stanley began producing the U.S. Passport Card at the Arkansas Passport Center in the first fiscal quarter.

The consensus on Wall Street, as polled by eight analysts by Thomson Reuters, is for earnings of $1.38 on revenues of $779.69 million for the current fiscal year. For the first fiscal quarter, revenues shot up 29%, while earnings increased 10.3%. Caso raised his fiscal 2009 earnings estimate to $1.39 from $1.33 on a better-than-expected first-quarter. Stanley is purported to grow 17.24% per annum for the next five years.

Still, near-term headwinds could create a bit of tailspin. Management expects fiscal second-quarter bookings to be light due to the timing of recompetes - contract wins awarded to Stanley for the second time related to U.S. passports and immigrant visas and U.S. Navy SPAWAR systems. However, management expects bookings to pick up in the second half of the fiscal year with additional contract wins. Stanley’s CEO, Phil Nolan, said in a conference call on July 31 that the company is sitting on the strongest pipeline in its history and that he expects the company will submit another 15 proposals of $100 million or more in the next six to nine months.

BB&T Capital Markets analyst Michael Lewis says he thinks the firm is up against high levels of historical success leading investors to maintain extremely high expectations for the firm. “We are optimistic on Stanley over the longer term, but with management calling out several specific near-term concerns we believe it is best to remain on the sidelines until the risk/reward scenario improves,” Lewis wrote on August 1.

Investors also ought to be wary of valuation. The firm trades at a premium to its government services peer group. Stifel Nicolaus analyst William Loomis downgraded the company to “hold” from “buy” on August 12, as the company had reached the analyst’s target price of $37 per share.

Caso’s valuation range is for a call of $36 to $42, implying a P/E that is 23 times to 27 times his calendar year 2009 earnings estimate. Right now the company is trading at current P/E of 25.7 at $35 per share and is fair valued.

So wait for a pullback and jump in because results look as though they will get finer with age.