|Shares Out. (in M):||23||P/E||11.5x||12.8x|
|Market Cap (in M):||1,729||P/FCF||7.8x||11.7x|
|Net Debt (in M):||516||EBIT||271||260|
CACI is a government services contractor with 75% of revenues coming from the DoD and 20% coming from US civilian agencies (5% international). The stock is at an all-time high, +33% last year, despite flat earnings estimates (EBITDA multiple expanded from ~5x -> ~6.6x). This is a ~$1.7bn market cap company with ~$600mm of debt that is adding ~$800mm in incremental debt to complete the biggest acquisition in its history (leverage going from ~1.5x -> ~3.5x). Pro-forma for the acquisition, the multiple will be ~7.5X 2014 EBITDA.
While the multiple is optically low, we think the company is overvalued for the following reasons:
Our recent discussions with defense contracting companies, consultants and government officials in the space give us further confidence:
What are the risks to the short?
|Entry||01/04/2014 12:46 PM|
What was his bull case and could this transformational deal provide further upside estimates for the bulls?
|Entry||01/06/2014 10:47 AM|
Unfortunately, I was not at Ira Sohn and have not been able to find a deck or a lot of details from his pitch, but from my understanding he spoke on CACI for 3 minutes and his main points were that the company has strong FCF (we don't think that cash is actually "free" as I point out above), is a potential M&A target (think less likely now due to major acquisition currently being digested), and that the stock was worth $75-$85 (currently $73.96).
This has been a great call for Robbins/Blue Harbor but we think the thesis has played out and risk/reward is not attractive from here, especially given the Six3 acquisition (my guess would be Robbins would have preferred to see them return cash through dividends/buybacks rather than buy something at 11.5x EBITDA).
In terms of accretion from Six3, the company will announce guidance inclusive of the acquisition when they announce earnings at the end of the month, but initially stated they expect it to be 5% accretive to GAAP earnings and 10% accretive to adjusted earnings. We view this accretion as not particularly impressive given the company is borrowing at L+200 to finance the acquisition - and from an EV/EBITDA perspective, the acquisition is actually quite dilutive, taking EV/EBITDA from 6.6x -> 7.6x (see detail below, sorry for formatting). One final point is that growth at Six3 seems to be slowing, as initial guidance was for ~$70mm in EBITDA for 2014 vs. $67mm in 2013. This is understandable as 10% of Six3's business is from Afghanistan which is likely going to zero in short order.
|Subject||GD guidance for IS&T division|
|Entry||01/22/2014 06:30 PM|
GD guided for IS&T revenues down 20% in 2014.
From GD's website: The Information Systems and Technology group provides solutions that support a wide range of networked communications, cyber security, and information-sharing and enterprise technology needs.
|Entry||01/23/2014 05:25 PM|
LMT's services division guided down revenue growth 9% for 2014. Wells Fargo (admittedly a bear on the space) said the following:
READ-THROUGH. 2014 outlooks confirm our prior view that organic revenue for government services providers is likely to remain under significant pressure. LMT's $195MM goodwill write-down relating to in-theater support work focused on the Army (included in its Technical Services business) could suggest a greater headwind for services providers, as LMT noted in-theater pricing (already competitive) was seeing intensified pressure. While operating margin performance remained strong for both, we remain cautious on the 2014 outlook for the pure-plays, as we believe there to be a more limited scope for additional cost reduction, rising overall price competition, and the lack of platform sales and lower pension funding.
|Subject||CACI FY Q214|
|Entry||01/29/2014 05:13 PM|
Quarter was fine, but in my view, updated guidance including Six3 is disapponting.
These numbers require some math/backing into:
- Raised total revenue guidance by $100-$150mm, but this includes a Six3 contribution of $275mm-$325mm, so actually lowered organic revenue guidance by $125mm-$225mm (4-6%)
- Kept net income guidance flat at $142-$152mm, but this includes Six3. If we add back the $10mm in one-time costs in the quarter, this means that the $835mm acquisition is only adding a run rate of ~$20mm in net income a year (it is likely higher than this but offset by lowered implied organic earnings guidance).
- EPS guidance LOWERED from $5.70 - $6.10 to $5.59 - $5.98 when including the acquisition - can't imagine this is what bulls had in mind.
PF I have the company now trading at 9x EBITDA ($1,150mm in debt ex. converts, $1.9bn market cap, $100mm in cash vs. $335mm in FY14 EBITDA) which seems awfully expensive.
|Subject||CACI comments from JPM Conf (3/11/14)|
|Entry||03/17/2014 07:18 PM|
So we do have more certainty today than we had a couple months ago. Our understanding is that some of those high-level appropriation and allocation decisions are being worked at a higher government level and then being pushed down to various program offices and individual customers. And so, as of yet, we haven't seen any material change in the pace of award decisions or funding decisions or proposals, because we anticipate some of that to be forthcoming, but this type of lag in the appropriation process is not unexpected.
Our fiscal year 2015 begins in July, in the early midst of our planning process to determine what 2015 looks like. Unfortunately, we had a few quarters of negative organic growth. This past quarter was approximately 10%. The question is have we hit bottom yet, and when will we see either a stabilization or a turnaround. And we had this conversation a few times on some one-on-ones this morning, and it's hard to know when you hit bottom, except retroactively, and then you know when you hit the bottom, and you start coming out of it.
|Subject||LDOS Q4 Report|
|Entry||03/27/2014 03:33 PM|
LDOS, a comp, reported 2015 guidance that was disappointing to the Street ($2.35 - $2.55 of FY15 EPS vs. $2.85 estimate). Stock is currently -18%.
In their comments, they said: As we look back at fiscal 2014 and into the future, it is clear that we continue to see pressure from our largest customers, including the Department of Defense, the federal government, and more recently the intelligence community. The impact of sequestration and the resulting lack of clarity in committing funds to programs, delayed decisions, and the high level of protest activity continue to weigh on our results.
This seems contrary to a lot of the bullish buzz around activity picking up over the next couple quarters in the space.
Note that the Six3 acquisition by CACI was in the intelligence space.
|Subject||CACI lowers FY14 guidance (again)|
|Entry||04/02/2014 04:55 PM|
So company is lowering guidance AGAIN after lowering on the Q2 earnings call at the end of January. Not a huge surprise perhaps because LDOS was down ~20% last week after lowering FY guidance and the IR guy was apparently very negative in meetings with Wells Fargo (they released a note), but the stock never reacted.
The numbers are a little messy because of the Six3 acquisition, but if we back that out, here is a comparison of current guidance vs. original guidance:
So since original FY guidance on 10/29/13, they have lowered organic rev guidance by ~10% and NI guidance by ~15%. Since that time the stock is +5% at today’s close.
New multiples for 2014 using the closing price of the stock ($74.56) are 14x P/E and 9.3x (!) EV/EBITDA.
FY15 numbers seem way too high. Consensus has $6.14 of EPS next year and $370mm of EBITDA, which implies +18% growth. Earnings are likely to decline in FY15 (as they will in FY14, despite three quarters of Six3 non-organic growth).
At $68, stock is still 12.8x new EPS for this year and more importantly 8.8x EV/EBITDA. This seems way too high for a bad business with flat to declining earnings.
Next catalysts are: 530am call tomorrow, Q314 earnings on 4/30, and FY15 guidance at the end of June.
|Subject||RE: RE: CACI lowers FY14 guidance (again)|
|Entry||04/03/2014 07:28 PM|
Yes, very surprised the stock wasn't down more today (lowered EPS guidance by 8% and stock down 4.2%). Comp MANT was down 6.3% on no news. CACI now trades at 9.3x 2014 EV/EBITDA and 8.6x forward EBITDA which has ~10% growth baked in, which I think will prove to be way too optimistic.
The call was negative, I thought. Analysts kept trying to get them to say this was just a delay in awards/revenues but they didn't seem willing to say it. The only positive was that they maintained CFO guidance, but as I have pointed out, the FCF isn't worth much when you are constantly making acquisitions just to keep earnings flat (or declining, this year).
|Subject||CACI Q3 Earnings|
|Entry||05/01/2014 07:17 PM|
CACI was up ~4% today on in-line Q3 earnings and reiterated guidance for the full year (which ends 6/30 - they had lowered a month ago). Cash flow was better than expected based on working capital (but I believe this is a timing difference on A/R) and orders were up but book to bill was still 0.8x indicated further revenue declines. Most importantly in my view, organic revenue growth was -12%, an acceleration from -9% in Q214.
This name really comes down to full year FY15 guidance given at the end of June - the Street has EBITDA +9% in FY15 - if guidance is for EBITDA to decline, which we expect given the constant headwinds in the space, we think the 8.5x forward multiple is at risk in addition to estimates.
|Subject||CACI comments from RBC conf (5/14)|
|Entry||05/14/2014 04:43 PM|
Below is from RBC's note, presented without further comment:
Rick Dansey noted that despite the optimism towards the end markets at the beginning of the year, they really have not seen it play out in awards. Val Lyons reiterated that it was still a difficult environment, using an example of a project that has slipped on awards for several quarters now. They noted the government is being a little tighter because they are not sure whether they should be awarding projects at this juncture due to future budgeting decisions as well as possible volatility from events like Crimea. There is a lot of variability across customers and agencies, but the overall outlook is still bearish at this point.
|Subject||RE: RE: Author Exit Recommendation|
|Entry||06/27/2014 01:34 PM|
This was catalyst we were waiting for and stock still not reacting - been three negative events (guidedowns/disappointing guidance) and stock hasn't really moved, although underperformed mkt meaningfully. Taking our cue from the price action and moving on here now that expectations have been lowered for FY15.