The U.S. Government Accountability Office is located at 441 G Street NW in Washington, DC. By any account, it is a rather unremarkable building. It is your typical government structure; built for productivity and functionality, as opposed to aesthetic appeal or innovative design. From the outside looking in, it resembles a building eerily similar to an urban high school, or a modern prison. It is assumed that passersby rarely even notice it's there. It blends into the landscape much like a tree blends into the forest.
However, it is here where rather significant decisions are made regarding public expenditure, and greater economic efficiency. The Government Accountability Office is responsible for the audit, evaluation, and investigation, of any public sector commerce discrepancies, which may affect the federal government's accountability to the American people. In other words, the Government Accountability Office, or "GAO" as it is most commonly referred, is responsible for, among other things, ensuring that all business dealings conducted by U.S. government agencies are reputable, and free of corruption. Therefore, this rather inconspicuous building, actually houses a considerably influential constituency of domestic watchdogs.
It was here, at the GAO, where a recent discrepancy between two companies competing for one contract was settled. This matter had already been resolved; twice. However, in America, where bureaucracy empowers contestation, and capitalism enables competition, most fights often go at least three rounds. Such was the case in this instance, where the WidePoint Corporation (WYY) was finally awarded a conclusive victory over the protesting entity, Telecommunications Systems Incorporated (TSYS). One can hardly blame the protester for their relentless vigor. After all, the end result of the GAO decision was going to see one company awarded a 600 million dollar contract with the Department of Homeland Security. Thus, the fight was well worth fighting. Nonetheless, the fight is over now, and the end result has defined two clear winners; WidePoint, and its shareholders.
Approximately two weeks ago I wrote a bullish article on the future of WidePoint, a Virginia based provider of advanced information technology solutions to government and commercial markets. This article was met with, initially, robust disputation. Many readers were, at first, appalled by the fact that I had left out this seemingly pivotal potential award. That is to say, I did not include in my analysis, or forward looking conclusions, any consideration of this 600 million dollar contract. As it was still pending, it was my contention that to indicate probable award would have been misleading, and to weigh the chances of possible loss could have induced irrational concern. Therefore, I opted to assess the company based on what was known at the time with absolute certainty. This was, again, not well received in the beginning. The article was lambasted with statements such as the following;
"You forgot to mention the 600 Million dollar Dept. of Homeland Security contract that has been awarded to WYY, & is under a 2nd protest, as the first protest was dismissed! The second & last one will be dismissed in the next few days!"
"How do you explain why you left out a SIX HUNDRED MILLION DOLLAR CONTRACT WIN for WYY? Get Real."
And, of course, there was the most well-crafted and humorous of all comments;
"You should have your computer impounded and your online trading account turned over to a legal guardian."
That was the most popular one. It received numerous "likes", including one from me. It was my favorite of all the comments. In truth, each of these readers had justifiable cause to be upset. As shareholders, they had not only endured multiple protests and delays as a result of the aforementioned contract, but they had also seen multiple recent reports generated which painted WidePoint in a less than desirable light. For the record, those reports were wildly misguided, and almost embarrassingly out of context. In fact, those reports were part of the motivation for my first article having been written. I felt that WidePoint's stock had been under a poorly timed, irrationally crafted, and horrifically inaccurate attack.
Once the dust settled, and a mutually respectful exchange of perspectives had been shared, readers gained a better understanding of the articles position, and normalcy and camaraderie was successfully restored. I assured those readers, for which there were thousands, that I would complete a follow up piece once the final decision regarding the protest had been rendered. Well, that decision has since been made, and thus, this piece is now being written.
The DHS, the GAO Decision, and the Future of WidePoint
WidePoint released their official statements regarding having been irrevocably awarded the Department of Homeland Security contract, on December 23, 2013. Their statements were, as was expected, rather mundane and modest. Jin Kang, WidePoint's Chief Operating Officer, stated the following;
"We are honored to be selected to support the DHS Cellular Wireless Managed Services Program."
DHS, of course, is the applicable shorthand for the Department of Homeland Security. Moreover, the CEO of WidePoint, Steven Komar, followed Mr. Kang's statement with comments of his own. He stated the following;
"WidePoint is committed to developing and delivering innovative, enterprise-wide, managed mobility solutions to government and commercial clients. We are both pleased, and very proud, to have the opportunity to materially expand our support of DHS as a result of this award."
Now, while these comments are certainly positive, they are also in line with the historically bureaucratic pastime of managing to say something, while revealing nothing. They certainly do not offer much insight into the impact of this newly awarded contract. What affect will this contract have on the company and its shareholders? How long will it take for this agreement to influence share price? What is the duration of the contract, and what does it cover? These are the questions which shareholders, and prospective shareholders, require answers to.
First of all, in order to assess the impact of this contract, once must have an established starting point. For the purposes of this article, the starting point will be reflective of the conclusion drawn in my previous article. That conclusion was reflective of a 12 month price target of 3 dollars per share. Therefore, that will be our baseline.
Secondly, one must understand the nature of the awarded contract, and its prospects, procedure, and duration. So, let's define those facets. The awarded contract is a BPA, or Blanket Purchase Agreement, with a one year base period of performance, and four additional one year options. The right to exercise those one year options belongs to the DHS; however the latitude to decline those options is restricted to certain criteria, and is highly unlikely. Nonetheless, the right to exercise those options, or to not exercise them, does exist. Fundamentally however, it is a five year contract.
The BPA pertains to "comprehensive commercial cellular wireless managed services." In essence, what that means, is that WidePoint is providing to the DHS access to multiple cellular carriers and the execution of their services. Those services will include managed costs, a web portal for device ordering and management, cellular wireless equipment and devices, cellular and data services, mobile device management, project management, services to enhance in-building cellular coverage, help desk services, and other optional support provisions. Those additional support provisions may include additional data security, and cyber-protection services. What is also important to note here, is what the DHS contract consists of in terms of who the DHS is defined to be.
WidePoint will not just be servicing one DHS building, or one DHS department. The BPA covers services to be provided for the DHS and all DHS components. Those "components" include DHS headquarters, U.S. Customs and Border Protection, U.S. Citizenship and Immigration Services, the United States Coast Guard, the Federal Emergency Management Agency, Immigration and Customs Enforcement, the United States Secret Service, and the Transportation Security Administration. In consideration of these details, this contract is easily the largest, and most impactful, that WidePoint has ever procured. In the first year alone, the contract is worth an estimated 65 million dollars. That value is significant seeing as the company's current market cap is only 95 million.
It will likely take 3-6 months for the full services package to be rolled out. This is a result of the fact that, during the protest contested at the GAO, a stop work order was issued. Therefore, over the last number of months, no progress has been allowed to be made from the time of the original award. As a result, it stands to reason that noteworthy impacts on the company's current stock price may not be fully realized until quarter three of 2014. However, in the meantime, revenues should increase incrementally. When compared to the company's most recently reported quarterly revenues, which were equal to 12,225,505 dollars, as well as the applicable run rate associated with such, it would be reasonable to forecast the company's revenues tripling in quarter three of 2014. The revenues associated with the DHS contract alone, estimated to be 16,250,000 per quarter in the first full year of services, represent a 134% increase by itself.
Now, once services are all fully operational, and depending upon which optional BPA provisions are exercised by the DHS, the full value of the contract, over five years, could be worth 600 million dollars. In fairness, it may not reach that full materialized value, however, even in the event of complete stagnation following year one, the contract would still be worth no less than 325 million dollars over its fully exercisable duration.
Assuming the baseline referenced herein, and the prospects associated with the newly awarded DHS contract, an increase in the 12 month price target equal to approximately 27% is further warranted. This number was determined by utilizing the following methodology;
Anticipated revenue growth as a result of the DHS contract alone is forecasted at 134%, quarter over quarter, predicated on revenues most recently reported. The assumption of that number divisible by a factor of 4, in consideration of current margins and applicable expenses associated with the cost of revenues, brings us to 33.5%. In respect to the work order on the contract just recently being reactivated, and the time required to roll-out services accordingly with meeting these new demands, a conservative applicable ratio of .8 is then applied. That concludes that the appropriate increase is equal to 26.8%. Therefore, the new price 12 month price target for WidePoint shares is determined to be 3.80 per.
That being said, as I do not anticipate the impact of this contract being fully realized in earnings per share until quarter three of 2014, I will also offer an 18 month price target as such is applicable in this case. Assuming that the DHS exercises its first option for continuation of services after the one year base period, at the same quantity of opted amenities, the 18 month price target would reflect the first full 12 month period of completely rolled out services. In other words, the revenue impact would have been felt for a full 12 months, only after 18 calendar months. Thus, the 18 month price target for WidePoint shares is equal to 4.20 per.
As was previously stated in the first article (which I suggest reading if you haven't already) there are considerable risks associated with an investment into WidePoint. Cash flow, long-term debt, and a competitive market are all worthy of causing investor hesitation. Those were previously covered. However, as it pertains to risks associated with this BPA contract, and the forward looking projections associated with it, there are some new risks to be considered. First of all, while it is a "600 million dollar contract", that value is not guaranteed. The DHS could opt out after year one. That is, at the very least, a possibility. Also, even in the event that the contract is continuously opted for, the DHS may not opt for every available contingency and service. That could value the contract at only 325 million dollars. Secondly, the costs associated with generating these revenues, or the costs associated with WidePoint fulfilling their end of the agreement, are yet to be determined conclusively. If the costs associated with such overrun their current estimates, the generated profits could be considerably reduced. Lastly, when a company lands a "landmark contract", as this clearly is for WidePoint, the possibility of neglecting existing clients and responsibilities is sometimes an inadvertent consequence. If the focus on servicing this contract were to adversely affect relationships with current customers, then the benefits of this DHS agreement could be further minimalized.
The decision of the GAO to verify, and reaffirm, the awarding of this BPA contract to WidePoint is a significant step forward for the company. While WidePoint has previously secured, and successfully fulfilled, multiple other government contracts over the years, the procurement of a contract of this magnitude is noteworthy. A potentially 600 million dollar contract, for a company with a 95 million dollar market cap, is transformative. Furthermore, this may only be the beginning.
Not only is this announcement coming only weeks after the company's agreement with Compass Group PLC (OTC:CMPGF), but WidePoint has indicated there is another agreement in place which they will announce formally at the "appropriate time." While it remains a mystery to date, it has been described as yet another "lucrative and sizeable contract" capable of further expanding the company's market share. If that contract does indeed come to fruition, then yet another reassessment of WidePoint may have to be undertaken.
That being said, WidePoint is, undoubtedly, a company to watch in 2014. Perhaps more appropriately, it may well be a company worth investing in today. Given the calculable price targets detailed herein, WidePoint appears to have impending upside equal to 150% in a years' time, and potentially 180% in 18 months. That is tremendous. Moreover, there are multiple protocols in place to protect against downside risk. First, the company works in a largely insulated space; government and commercial commerce. Secondly, the company has 13% of its total outstanding shares held by insiders, and 21% of its total outstanding shares held by institutions. Lastly, with a beta of 0.82, the company's price stability is exposed to volatility only minimally. All these features bode well for shareholders.
Readers would be wise to consider initiating, or adding to, positions in WidePoint as 2013 comes to a close. 2014, and 2015, should prove to be a period of monumental growth for the company. As a result, shareholders in WidePoint should enjoy substantial returns on their investments over the next two years. So, while nothing in the equities market is ever guaranteed, WidePoint certainly appears poised to make a tremendous multi-year run. Being a part of that should prove to be financially worthwhile.
Additional disclosure: It is advised that all prospective investors complete their own relevant due diligence prior to initiating an investment into any company detailed herein, or on any other web based platform.