VSE Corporation Turns in a Great Quarter

| About: VSE Corporation (VSEC)

VSE Corporation (NASDAQ:VSEC) recently reported the results for its third quarter of 2008. Revenue grew 76%, net income grew 58%, and diluted earnings per share grew 58%. For the nine month period ending September 30, 2008, revenue grew 64%, net income grew 42%, and diluted earnings per share grew 38%. As of September 30, 2008, funded backlog was 706M, up 73% from 408M at December 31, 2007.

The company has a market cap of 145.4M corresponding to a stock price of 28.62 and has generated 10.3M in owner earnings for the first three quarters of this year which implies a run rate of 13.7M for the year. With 1.1M in cash and no debt, the company has an enterprise value of 144.3M and therefore is trading at an EV/OE multiple of 10.5. A DCF calculation based on a 5-year growth period, 3% terminal growth, and an 11% discount rate shows that the current price reflects an assumption of no growth.

Given the growth rates this company has been experiencing as well as the funded backlog which is substantial and growing as well, it appears that the market has seriously undervalued this stock. In fact, the current price looks like a screaming bargain. The one caveat here can be summed up by CEO Mo Gauthier’s observation that “We expect to complete a record year in 2008, and the current prospects for continued growth in 2009 appear to be favorable; however, 2009 is a federal government transition year and government spending priorities may change in ways that we cannot predict.”

Disclosure: Author holds a long position in VSEC