In today’s volatile business environment, sometimes its more important to determine who your customer is, than figuring out exactly what you are offering. Stanley Inc. (SXE) has built a strong business by offering services primarily to the US government, which gives them a bit more revenue stability than contractors offering services to the private sector.
Stanley is involved in a number of different service categories:
- Systems Engineering
- Enterprise Integration
- Operational Logistics
- Business Process Outsourcing
- Advanced Engineering and Technology
A diversified approach to the services offered helps to spread contract risk across a number of different areas of government spending so that no one project can make or break the firm’s budget. Despite having their hands in so many different government projects, Stanley is still basically a small-cap company with an innovative spirit. It’s very easy to imagine an environment where the company could continue to grow revenue and earnings at an attractive rate for several years to come.
Since Stanley operates with a fiscal year which ends in March, their most recent reporting period was the first quarter of fiscal year 2010. The company reported record earnings of $0.45 which exceeded prior guidance. The strength was due in part to progress on a major contract with the US Marine Corp for the Joint Strike Fighter Program. Revenue was up 21% over last year at 208.7 million. SXE has strung together quarter after quarter of revenue and earnings growth and management appears to be very skilled in successfully engineering a healthy growth trajectory.
While the first quarter numbers were very attractive, investors were a bit spooked by comments from management indicating that there were some delays in contract awards. As a result of these delays, management lowered revenue and earnings guidance for the second quarter and fiscal year. The firm should still grow earnings by more than 10% in 2010, but this is below the trend line of 20% or higher growth investors have become used to dealing with.
Stanley continues to post record operating margins and net income as we see more favorable contract mix and realize greater operational efficiencies.
~Phil Nolan, President and CEO
Still, the backlog of awarded contracts remains robust at roughly $2 billion. This means that the company could work for roughly 30 months without winning a single contract before it would run out of jobs. So while the guidance was a bit of a disappointment, the company is still very healthy and it looks like the initial selling was a bit too dramatic considering the fundamental strength. Over the past couple of weeks, the stock has begun moving higher as investors once again view the company’s value in a positive light.
Currently the stock is trading at roughly 17 times this year’s expected earnings. While it is difficult to know exactly how much the company will grow over the next two years, I think analysts' 10% and 11% earnings growth expectations are a bit too conservative. If the 2011 estimates are eventually raised to be closer to $2.15 per share (still a conservative number) and investors place a more confident multiple of 23 to 25 on the stock, we could easily see the stock trade 60% from this level.
Stanley has proven itself to be a strong competitor in a stable industry. The company will likely offer positive surprises in the coming months and I expect investors to be rewarded in the next 6 to 12 months.
Disclosure: Author does not have a position in SXE.