PEC's Pentagon Power

The war on terrorism could open up more doors for PEC Solutions (PECS ). The Fairfax (Va.) company not only develops systems to improve the efficiency of government and the armed forces' use of the Internet--but also builds the security systems that safeguard sensitive data. Private for 16 years before going public in April, 2000, it has been on a roll: Reported profits of $3.7 million in the third quarter of last year amount to a 64% increase over the prior year. Revenues were up as much, to $29 million. Then came September 11: PEC's stock quadrupled in 2001, to 37.5.

At this level, it trades at a lofty 58 times consensus earnings forecast of 64 cents a share for 2002. UBS Warburg equity analyst Adam Frisch adds, "The estimates for this year may turn out to be conservative." That's because some new developments aren't yet built into the forecast: On Nov. 20, PEC acquired rival TROY Systems for $18 million. TROY will contribute at least an estimated $33 million in revenues and 5 cents in PEC's per-share earnings. But not all the benefits of the merger have played out. Cross-selling and margin improvements could bolster profits. Even more, anticipated IT security contracts from the new Office of Homeland Security and government offices--forecast to jump 15% to $65 billion by 2007--have not been calculated into the mix.

By Mara der Hovanesian

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