CACI International, Inc.

Company Overview: CACI International, Inc. (NYSE: CACI) is a technology integrator, engaged in offering high-end solutions in engineering, IT, and mission solutions throughout the defense, space, civilian, and intelligence markets. The company’s solutions augment defense and intelligence capabilities, improve decision-making, assure homeland security, and help customers to operate smartly and competently. CACI faces intense rivalry from Science Applications in the federal space.

CACI Details

Buyout Synergies and Contract Wins Are Key Positives: CACI International, Inc. (NYSE: CACI) offers IT-based applications and infrastructure to enhance communications and secure the reliability of information systems and networks, boost data collection and analysis, and increase efficiency and mission effectiveness.  The company generates its revenues via four customer groups: Department of Defense (DoD), Federal Civilian Agencies, Commercial and Other, and State and Local Governments. In FY20, the company reported revenues of $5.72 billion, up 14.7% year over year. CACI’s revenues mainly come from three types of contracts, which comprise- (1) cost reimbursable type contracts, which accounts for ~57.2% of FY20 revenues; (2) firm-fixed price type contracts, which represented 28.5% of FY20 revenues; and (3) time and materials, which constituted 14.3% of FY20 revenues.

Going Forward, the company expects to benefit from increasing organic revenue growth and continued margin expansion. Management noted that despite the impact of COVID-19, EBITDA margin stood at around 10% in FY20.

CACI International, Inc. has gained from its large pipeline of government projects. Recently, the company won a six-year single-award contract, for a consideration of over $152 million, by the Department of Veteran Affairs to deliver enterprise expertise in support of the department’s Financial Management Business Transformation Program (FMBT).  It also won a five-year, single-award task order, with a ceiling value of ~$128 million, to provide mission expertise to the U.S. Army Program Executive Office for Soldier (PEO Soldier) on maneuver. Other contracts won by the company include a $1.5-billion, single-award Indefinite Delivery/Indefinite Quantity (“IDIQ”) contract to provide its enterprise Information Technology, transport, and cybersecurity services to the National Geospatial-Intelligence Agency (NGA) and its partners. It also won a $249 million IDIQ contract by the Naval Sea Systems Command (NAVSEA).

The company witnessed a CAGR of 10.8% and 20.5% in revenue and net income, respectively over the period of FY15-FY19.

Past Performance (Source: Company Reports) 

Despite the budget and aggressive rivalry pressures impacting the industry, the company is well-placed to safeguard and increase its existing customer base. The company’s robust scale, size and prime contractor leadership gives the company a competitive lead in the market, particularly on large contracts. Recently, the company acquired Ascent Vision Technologies, LLC, that will increase its reach in the multi-domain intelligence, surveillance, and reconnaissance (ISR) operations. The buyout is expected to be a key driver in implementing its long-term strategy and deliver sustained profitable growth. The acquisition will also boost the company’s margin profile and cash-flow generation capacity. Looking ahead, the company is set to gain from several government contracts, which lends stability to its business and manages variation in revenues.

4QFY20 Key Highlights: During the quarter, the company reported earnings of $3.68 per share, which skyrocketed 87.2% from the previous corresponding period. Revenues for the quarter came in at $1.5 billion, up 8.9% on a year over year basis, owing to new business wins, acquired contracts and on-contract growth. Organic revenue during the quarter grew at 8% on a year over year basis. Contract awards during the quarter were worth $3.4 billion, of which approximately 55% came from new businesses. As of June 30, 2020, total backlog stood at $21.6 billion, an increase of 28% year over year. Funded backlog at the end of June stood at $2.8 billion.

 In terms of customer mix, the Department of Defense, Federal Civilian Agencies and Commercial and other customers contributed 69.1%, 26.8%, and 4.1% of total revenues, respectively, during the quarter. Revenues from prime contractors represented ~91.7% of total revenues in 4QFY20, while revenues from a subcontractor accounted for 8.3% of total revenues. In terms of contract type, cost reimbursable type contracts, fixed-price contracts and time and material type contracts contributed 57.2%, 27.9%, and 14.9% to total revenues, respectively.

4QFY20 Key Highlights (Source: Company Reports)

Operating Details: During the quarter, operating income increased 64.8% year over year and came in at $133.7 million, owing to higher revenues as well as lower indirect costs and selling expenses. Operating income margin during the quarter came in at 8.9%, up 300 basis points (bps) year over year.

Adjusted EBITDA came in at $162.9 million, up 48.8% year over year, whereas adjusted EBITDA margin expanded 290 bps and stood at 10.9%.

Balance Sheet and Cash Flow: The company exited the quarter with a cash balance of $107.2 million, and total long-term debt amounted to $1.36 billion. Cash flow from operations stood at $518.7 million, owing to growth in net income and lower DSO (Days sales outstanding). Notably, robust cash flow and borrowing capacity provide ample capital to the company for continued investment and available liquidity for unforeseen events.

Cash Flow & Capex (Source: Company Reports)

Recent Updates: On 17 August 2020, the company announced that it has appointed Todd Probert as President of CACI’s National Security and Innovative Solutions (NSIS) sector.

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 40.74% of the total shareholding. The Vanguard Group, Inc. and BlackRock Institutional Trust Company, N.A. holds the maximum interests in the company at 10.57% and 8.25%, respectively.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Key Metrics: The Company reported FY20 gross margin at 35%, higher than FY19’s figure of 33.7%. ROE, in the same time span, stood at 12.8%, higher than FY19’s figure of 11.7%. FY20 debt to equity ratio stood at 0.53x, lower than the industry median of 0.61x. The company remains on track to deleverage its balance sheet in the coming times.

Key Metrics (Source: Refinitiv, Thomson Reuters)

Key Risks: The company is heavily dependent on U.S. government agencies as its primary customer, as a result, the loss of any of these agencies could unpleasantly impact future revenues and cash flows. Additionally, Competition from peers like Science Applications, IBM and Accenture in the IT services space remains steady. Also, a leveraged balance sheet and increasing competition add to the woes.

Future Expectations: In FY21, the company expects to remain resilient, and profitable by taking necessary steps to invest higher in key planned areas. Further, it also expects to leverage its new market access and capabilities from the buyout of Ascent Vision Technologies, LLC. For FY21, the company expects revenues in the range of $6-$6.2 billion, whereas, earnings per share are expected to be in the ambit of $13.50 and $14.28. Net income is expected in the range of $347-$367 million and net cash provided by operating activities is likely to be a minimum $580 million.

It is worth noting that the company will benefit from the continued flow of high-value contracts. The company’s mission-critical work, long-term contracts, a flexible operating model, and cost structure, along with supportive government customers are expected to aid the company’s growth, going forward. The company expects to accelerate margin expansion along with strong organic revenue growth throughout FY21.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)

EV/EBITDA Multiple Based Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The stock of CACI closed at $234.19 with a market capitalization of ~$5.88 billion. The stock made a 52-week low and high of $156.15 and $288.59, respectively and is currently trading above the average of its 52-week trading range. The stock went up ~18.36% in the last one-month period. CACI is likely to benefit from a robust product portfolio, which, in turn, will boost the top-line and support the growth. The company’s capability to maintain its existing contracts along with the newly awarded ones throughout the customer portfolio is expected to be a tailwind, going forward. Considering the above factors, we have valued the stock using an EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price with an upside of lower double-digit (in % terms). For the purpose, we have taken peers like Science Applications International Corp (NYSE: SAIC), Booz Allen Hamilton Holding Corp (NYSE: BAH), Leidos Holdings Inc (NYSE: LDOS), to name few. Hence, we recommend a “Buy” rating on the stock at the closing price of $234.19, down 0.55% on 31 August 2020. 

CACI Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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