Seeking Alpha: CACI Fighting A Rising Tide

Sell-side support may help a stock, but it certainly isn't an absolute requirement for outperformance. Government IT services specialist CACI International (CACI) isn't well-liked by the Street (just one "Buy" rating against 10 "Holds" and three "Sell" ratings), but the shares have more than doubled the return of the S&P 500 over the past year and sit just 3% below their 52-week high.

Throughout the ups and downs of federal budget cycles, CACI has been remarkably consistent at generating free cash flow, and almost equally consistent in leveraging that cash flow (and debt) to acquire businesses and expand its revenue footprint. Certainly times are getting more challenging for the entire government IT sector, as sequestration, the debt ceiling, and now the government shutdown all loom over the business.

While childishness among U.S. political leaders and necessary cutbacks in government spending do threaten the near-term revenue and free cash flow of CACI, I believe the longer-term outlook is still positive on balance. It may be difficult for CACI to outperform against the optics of sub-1.0 book-to-bills, weaker orders, and lower revenue, but value-oriented investors may want to use the time to dig into this one more thoroughly, as even near a high the shares look undervalued on a long-term cash flow basis.

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CACI Fighting A Rising Tide

Investopedia: CACI Gearing Up For Tougher Times

With about three-quarters of revenue going to the Department of Defense and upwards of 90% of revenue going to various Federal agencies in total, CACI International (NYSE:CACI) would seem to have a lot to lose from years of presumably tighter federal budgets. This "conventional wisdom" may create an opportunity for risk-tolerant investors; this company has been through budgetary ups and downs before, and a combination of quality execution and the potential for mergers and acquisitions (M&A) should help prop up results.

Recent Results Relatively Positive  
Bearish analysts have been calling for a major downturn in growth at CACI for some time, but the company stubbornly refuses to go along with that. In the last quarter, CACI reported 9% organic revenue growth and a nearly full point improvement in operating income. Funded backlog has been declining relative to revenue, though, and that's a reality that cannot be ignored.

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Investopedia: Computer Sciences - Uncertain Value With Certain Problems

It's a given that investors who wish to hunt for big returns generally have to take on outsized risks. IT provider Computer Sciences (NYSE:CSC) pushes that idea near its breaking point, though. Although this stock may well be very cheap, relative to its inherent earnings potential, "potential" is a dangerous word and there are very real issues with this company.  

An Unimpressive Fiscal Second Quarter  
There was little to encourage bulls in Computer Sciences' second quarter, and the stock was quite weak immediately afterwards. Reported revenue rose about 1%, and none of the reporting segments were especially strong. The North American public sector was down about 2%, and managed services was up about 2%. It's just not that impressive when compared to results at companies like International Business Machine (NYSE:IBM), Accenture (NYSE:ACN) or Cognizant Tech Solution (Nasdaq:CTSH).

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Invesotpedia: Can CACI Get A Bigger Piece Of A Smaller Pie?

Weak federal government spending has been a problem for a lot of companies recently, including Cisco (Nasdaq:CSCO) and NetApp (Nasdaq:NTAP). With major worries about the unsustainability of recent budget deficits and political pressure to cut spending, it wouldn't seem like a good time to invest in companies that largely rely on federal business for their revenue. Still, with IT products and services that help government agencies modernize and cut costs, CACI International (NYSE:CACI) may be able to capture a bigger piece of smaller budgets. (To help further identify company success, read 3 Secrets Of Successful Companies.)

A Stronger Fourth Quarter Than Expected  
CACI managed to log better than 13% growth in the fiscal fourth quarter, slightly beating the average analyst guess. Organic growth was strong as well, at better than 11%. As usual, business from the Department of Defense was the driver this quarter - up more than 17% and making up 81% of sales. Revenue from federal civilian agencies, the company's second largest category, was down more than 2%.

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Investopedia: SRA Today, CACI Tomorrow?

Acquisition announcements on Fridays are a bit rare, but that was about the only really surprising part of the announcement that IT services provider SRA International (NYSE:SRX) was taking a bid to sell itself. What may be more interesting for investors, though, is the speculation as to whether SRA will get a competing bid and/or whether other leading IT service companies may see a revaluation of their shares.

SRA - A Solid Bid at Last
There have been rumors for a little while that SRA was attracting buyout interest. There was a rumor back in January that Britain's Serco had offered $2 billion, and the company has basically been in play ever since. Those rumors came to some fruition with the announcement Friday that the company had accepted a bid from Providence Equity Partners for $31.25 a share in cash, or a total deal value of $1.9 billion.

At $31.25 a share, Providence is giving shareholders a 10% premium to Thursday's closing price and more than a 50% premium to the price before the deal speculation really got going. Like the eBay (Nasdaq:EBAY) deal for GSI Commerce (Nasdaq:GSIC), this offer is including a 30-day go-shop period; likely in the hopes of de-fanging the ambulance-chasing class action suits that seem to be popping up these days whenever a deal is announced. (For more, see Is eBay Looking At GSI Commerce As Another PayPal?)

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An Intelligent Deal For Raytheon

The unpredictable and highly political nature of defense and intelligence spending make it difficult for small, publicly traded defense companies to really thrive. It is not all that surprising, then, that there has been a wave of M&A in the space - not only due to the increasing significance of electronic warfare and the need for bigger companies to add technology, but also the increasing uncertainty of spending in the face of higher deficits and debts.

With all that in mind, then, it is not surprising to see Monday's announcement that Raytheon (NYSE:RTN) reached a deal to acquire Applied Signal (Nasdaq:APSG). (For background reading, check out the Mergers & Acquisitions Tutorial.)

The Scoop on the Deal 
What is a surprise is that Applied Signal's management essentially put itself on the block back in October of this year. This is surprising because the company's management had not been very warm to the idea of a sale for many years. With that change in attitude though, things moved quickly.

Raytheon, one of the largest defense companies in the world, announced that it would acquire Applied Signal for $490 million in an all-cash deal that values Applied Signal at $38 per share. That is not only a 9% premium to the stock's closing price on Friday, but also a 90% premium to where the stock traded before management publicly discussed the possibility of a sale.

All in all, this is an eminently fair deal for Applied Signal shareholders. Relative to deals like Boeing (NYSE:BA), which bought Argon ST; Northrop Grumman (NYSE:NOC), which bought Essex; and FLIR (Nasdaq:FLR), which acquired iCX Tech; if APSG goes out at more than 15 times its trailing EBITDA, it's a fair price.

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