Online Extra: Homeland Security Is CACI's Domain

Specializing in IT work for the intelligence community, this Beltway company has zoomed to a higher profile since September 11 attacks

By Stan Crock in Washington

For years, CACI International (CAI ) was just a little, well-run Beltway Bandit that flew under the radar. But 2002 may be a breakout year for the Arlington (Va.) information-technology company. Its stellar growth landed it the No. 3 spot on the Standard & Poor's SmallCap 600 list earlier in 2002, and now it's No. 1 on BusinessWeek's Information Technology 100. CACI started trading on the New York Stock Exchange on Aug. 16, institutional-investor interest is on the rise, and CACI is on track to be a $1 billion company by 2005.

As a company that runs and designs communications networks, has major contracts with the intelligence community, and can offer services that keep information secure, CACI stands to profit from the expected focus on homeland security. That's why analysts are bullish. Bill Loomis, an analyst at Legg Mason Wood Walker, rates it a buy and has a $50 target on the stock, now trading around $40.

"It's one of the best-managed companies in the federal IT space," Loomis says. CACI Chairman and CEO J.P. (Jack) London "has shown a very good track record of spotting large macro trends in government spending and positioning the company to benefit from those trends," he adds.


  The good thing about network management, notes Loomis, is that it's an ongoing revenue stream, unlike creating custom software, where the income ends once the program is completed. In the last quarter, CACI had among the highest internal growth rates of any federal contractor, Loomis says.

Similarly, Cynthia Houlton of RBC Capital Markets rates the stock a top pick and has a target price of $45. Chris Penny of Friedman, Billings, Ramsey & Co. thinks CACI will benefit from the election, since Republicans may make it easier for the government to streamline procurement procedures and use outsourcing companies such as CACI. "The government itself is so backward as far as technology is concerned," he says, that CACI can find a lot of business in its niche.

Mike Legg, an analyst at Jefferies & Co., rates the stock accumulate and has a target of $43. "It's fully valued," he says, "reflecting the sound fundamental position of the company." He adds that CACI is benefiting from increased defense spending and that with its clean balance sheet, it's well positioned "to be a consolidator in the industry."


  CACI's latest figures show why analysts like it: Earnings jumped 39%, or $9.4 million, for the quarter ended Sept. 30 on a 29% rise in revenues, to $188 million. Business with the federal government, which accounts for 91% of revenues, rose 35% over the year-earlier period, and 21 percentage points of that stemmed from internal growth.

CACI has an internal growth-rate target of 12% to 15% and pegs growth from acquisitions at an additional 8% to 10%. To bankroll mergers, it has about $141 million in cash and marketable securities and roughly $160 million available through a line of credit.

CACI won $1.1 billion in contracts in the last six months, including a $500 million deal to help run the Pentagon's global-communications network. Its business includes everything from ensuring that the system for firing nuclear weapons on submarines is error-free to managing the sensor system for detecting violations of the Nuclear Test Ban Treaty. "If some rogue nation decides to detonate a thermal nuclear device, we would be able to pick it up and triangulate through an array of sensors and determine where it is," London says. "We can monitor the entire globe."


  More prosaic contracts include handling the Federal Aviation Administration's worldwide administrative-data network and running a system for the Justice Dept. that enables lawyers in complex cases with millions of documents to find the one they need quickly.

Still, London knows that competition will be fierce over the next year, as other companies eye the same growth markets. The $52 billion federal information-technology market is expected to grow at just under 10% a year for the next few years. CACI will be counting on its performance record and its established relationships with a variety of government agencies to keep its momentum going.

Yet CACI's higher profile has its drawbacks, including increased scrutiny of any hiccup. A flap over its guidance for the quarter ended June 30 -- CACI's fourth quarter -- briefly made analysts wary. It also prompted company officials to pay more attention to demands for better communications with the Street, especially amid the ongoing corporate book-cooking scandals.


  What happened in April when the guidance was given is like the famous Japanese movie Rashomon: Every player had a different take on the events. The critical ingredients in this recipe for a mini-crisis were a secondary offering, which diluted earnings per share, and a potential merger, which would have offset that earnings-per-share reduction to some extent.

To hear CACI officials tell it, the problem was that some analysts failed to include nearly 5 million shares issued in the secondary offering in their First Call EPS consensus estimates. That meant the estimates were high, and even if CACI's total earnings were on target, it would be a disappointment.

Some analysts agree. When Friedman Billings' Penny plugged the right number of shares into his model, the figures came out just as CACI predicted. But he had called CACI to find out what the right number of shares should be and was reminded of a pending merger that was supposed to close by the end of the quarter. Instead of revising earnings downward for the secondary offering, then upward for the merger's accretive impact, he waited. But the merger fell through, and his estimate at First Call was too high.


  In this scenario, CACI was partly to blame because it raised the issue of the merger, and analysts were to blame if they took it into account. They should have ignored a merger that hadn't yet closed, says RBC's Houlton, but some apparently had anticipated it in their models.

Jefferies' Legg has a completely different take. He says he had included the new shares in his model and insists that CACI did in fact lower earnings guidance because a swing in interest income was what would enable it to meet its profit target. Company officials disagree. "We didn't change our projections," London says.

Wherever the fault lay, the confusion sent CACI's stock into a nosedive, with its price dropping 25% within days, to around $30. It bounced back over the summer to around $40 a share.

Now, CACI is chastened. "The sensitivity of the investment community to these numbers is so intense," says London. Now "there's more activity on our part to try to keep in touch." That, plus CACI's performance, make it likely that the company is going to be on everybody's radar screen in the future.

Edited by Beth Belton

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