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VSE Corporation (VSEC) serves as a centralized management and consolidating entity for business operations. Their business consists of diversified program management, logistics, engineering, information technology (IT), and construction program and consulting services performed on a contract basis. VSE’s contracts are with agencies of the United States government and other government prime contractors, non-government organizations and commercial entities. They conduct operations under four principal segments: Federal, International, IT, Energy and Management Consulting and Infrastructure.
VSE Corp has been a sensational long-term grower, and its share price has reflected its fundamentals. VSEC shares grew from a (split-adjusted) 2001 low of $2.66, to a peak price in 2007 as EPS surged from $0.20 to $2.82 over that six-year period. Since then, earnings have continued to grow with the company reporting fully diluted EPS of $3.74 in 2008 and $4.67 in the period concluded on December 31, 2009.
Despite these stellar results, VSEC closed on Feb. 26th at $42.53 /share or just 9.1x trailing earnings. The shares had hit $54 as recently as January 21, 2010. Why did they sell off by about 17% last Friday? Q4 earnings came in at $1.01 versus $1.05 last year, and management also indicated that contract delays would hurt first half revenues and earnings.
Here are the VSEC’s per share numbers as reported by Value Line:
Year
Sales
C/F
EPS
Div.
B/V
Avg. P/E
2001
25.94
0.52
0.20
0.08
3.83
16.5x
2002
30.74
0.47
0.15
0.08
3.90
26.1x
2003
30.36
0.72
0.45
0.08
4.30
12.9x
2004
47.44
1.04
0.75
0.10
5.06
13.5x
2005
59.36
1.61
1.29
0.12
6.39
12.2x
2006
75.97
2.02
1.61
0.14
7.99
11.2x
2007
129.28
3.48
2.82
0.16
11.16
13.3x
2008
204.71
4.80
3.74
0.18
14.93
8.7x
2009
202.09
6.22
4.67
0.19
19.40
8.6x
The company is debt-free, pays a 0.47% current yield (at just a 4.3% payout ratio) and now trades at near its lowest P/E in the past decade.
A rebound to a still-below-normal multiple of 12.5x last year’s earnings would lead to a target share price of $59.50 or about 40% above last Friday’s closing quote. Is that reasonable?
As noted earlier, VSEC touched $63 in 2007 on EPS of just $2.82, and they hit $54 just six weeks ago before the record 2009 earnings of $4.76 /share were formally announced.
I originally wrote this one up on September 2, 2009 at $33.30/share. I used last week’s drop to add to my position.
Disclosure: Author is long VSEC
Source: VSE Corporation: Defending Strong Fundamentals