For public companies in the government services sector, the past few months have been discouraging. After steady improvement during 4Q11 and 1Q12, the median market multiples (enterprise value (“EV”) / trailing twelve months (“TTM”) EBITDA or revenue) for government services touched recent lows in early May. This significant investor caution was primarily due to negative earnings announcements / guidance in April. The broader stock market sell-off through the remainder of the month drove market multiples to the lowest levels in at least a decade.
To further put things in perspective:
- ManTech International is currently trading at ~$22 per share; in August 2008 it exceeded $60 and traded above $40 as recently as July 2011
- Dynamics Research Corporation is currently trading at ~$6 per share, in April 2011 it exceeded $16 and traded above $10 as recently as February of this year
- NCI is currently trading at ~$4 per share; it touched $30 in January 2010 and exceeded $20 as recently as August 2011
- CACI International is current trading at ~$43 per share; it traded above $60 as recently as May of this year
What isn’t easily determined is the impact that these trends will have on public companies’ strategies to deliver value to shareholders. Here are just a few of the possibilities: (i) batten down the hatches, improve balance sheets, build up cash reserves, and seek M&A when budgets look less gloomy, (ii) continue to initiate or increase dividends and / or stock buybacks to attract investors given high cash flow nature of Federal contracting, (iii) deploy cash via M&A into companies with strong positions in the limited number of high-growth Federal market segments, (iv) divest non-core or underperforming business segments, and / or (v) evaluate potential sale alternatives.
We would anticipate companies to pursue a combination of these strategies. Specifically as it relates to (iii), we anticipate similar government services M&A activity as in recent years, with annual transaction volume of approximately 80-100 per year continuing in 2012 and 2013. There have been 32 announced government services transactions through May. While public valuations remain depressed, those public companies able to navigate the market turmoil, maneuver an optimal recipe of the above, and thereby emerge stronger, may deliver significant shareholder returns over the mid- to long-term.
Contributors: Marc Marlin and Robert Dowling