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All general statements are false
By James. H. Smith
March 31, 2006
For the last year, predictions of cuts in US defense spending for hardware –
particularly traditional weapons – have been resounding throughout the
market, based primarily on statements out of Washington.
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As a counterpoint, investors have been urged to abandon plans to sink money
into Large Cap equities, such as Boeing, Lockheed Martin, Northrup Grumman,
General Dynamics and Ratheon.
Share prices of the companies have risen sharply over the last six to nine
months. Additional upside is expected as defense cuts failed to materialize.
Last month the 2007 fiscal year budget proposed a record US$439 billion for
defense – an increase of 5 per cent over fiscal 2006.
This increase in this year’s defense budget was not unexpected as President
George Bush began to back off from talk of cuts in late 2005.
However, the reversal in expected misfortunes for prime contractors has not
been accomplished at the expense of Small Cap companies playing in the
defense sector.
For example, New York Stock Exchange-traded CACI International, which
provides IT and network solutions to the defense and intelligence sectors,
posted strong results for the second quarter of the current fiscal year,
reporting US$419.5 million in revenue – up 7.7 per cent for the same period
last year – and net income of US$22.3 million, an increase of 16.4
quarter-to-quarter.
CACI continues its aggressive acquisition campaign, acquiring two companies
this month.
On March 1, CACI completed the purchase of substantially all of the assets
of Information Systems Support, Inc (ISS), a Maryland-based IT company with
substantial business with the US government, including the Defense
Department as well as civilian agencies. Terms of the deal were not
disclosed. However, estimates are that CACI paid US$145 million in cash for
the acquisition.
While CACI did not disclose a price for the ISS deal, the company was able
to discount its original offer, due to the loss on January 30 of a
significant contract.
While CACI has lowered original projections for ISS’ contribution, CACI
remains bullish on the acquisition.
On March 27, CACI announced signing of a definitive agreement to acquire
privately held AlphaInsight Corporation, also an IT company with a strong
presence at the US Department of State and additional business with the
Departments of Defense, Homeland Security, and Justice.
While CACI did not divulge terms of the transaction, which is expected to
close later this year, Alphalnsight recorded revenues of US$42 million for
its last fiscal year.
A key component driving the value of Alphalnsight is that 94 per cent of the
company’s approximately 360 employees hold security clearances, including 59
per cent with top secret or higher-level clearances.
CACI’s recent acquisition programme has included the purchase in October
2005 of application developers TCO Ltd through its UK subsidiary and
acquisition of federal analytic services firm National Security Research.
Also attesting to the robust market for high-tech companies in the defense
sector, New York-based L-3 Communications acquired two privately held
companies.
L-3 acquired Florida-based CyTerra Corporation, known primarily for its
mine-detection equipment, and California-based SafeView, which develops
security systems used in airports and for military operations.
Terms of neither deal were disclosed. L-3 said both acquisitions are
expected to be slightly accretive to L-3's earnings in 2006.
SafeView secured its initial round of venture funding from Draper Fisher
Jurvetson, DFJ ePlanet Ventures, Stanford University, and InVision
Technologies. Paladin Capital Group, Novak Biddle Venture Partners, and
Battelle Ventures participated in the Series B round in June of 2004.
Also a good sign for the high-tech sector is that the US Army plans to award
a number of high-value IT procurement contracts within the next four to
eight weeks for satellite services, hardware and software and to modernize
their infrastructure.
Industry firms submitted their proposals March 15 for the five-year, US$5
billion World-Wide Satellite Systems (WWSS) indefinite-delivery,
indefinite-quantity contracts, which are slated for award this spring.
Strong financial results from prime contractors, coupled with acquisition
appetite from established IT companies, the defense sector appears headed
for another good year.
Disclaimer
James Smith is an independent columnist for this web site. James Smith may
hold long or short positions in any of the stocks mentioned in this article
and those positions can change at any moment.
InvestorIdeas.com Disclaimer:
www.InvestorIdeas.com/About/Disclaimer.asp, InvestorIdeas is not
affiliated or compensated by the companies mentioned in this article. James
Smith is a freelance writer. Nothing in the articles should be construed as
an offer or solicitation or recommendation to buy or sell any specific
products or securities. Past performance does not guarantee future results.
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