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MOVING THE MARKET

In light of the ongoing debt ceiling discussions in Washington, one of the most likely outcomes is that we are going to be seeing steep reductions in spending by the U.S. government.

OUR OUTLOOK

Regardless of the outcome of the debt ceiling debate or the fiscal compromises that will eventually be reached, there are a few things we can be certain of – the reduction in the overall government workforce will continue (from January to May, state and local governments have already shed 100,000 workers) and the U.S. government will significantly cut spending. This reduction in government expenditure will impact a significant number of federal spending programs, so the question is: which suppliers to these government programs have shown the least resilience amid these talks thus far this year and which are positioned to be cushioned from the blow of budgetary cuts?

REVERE RESEARCH REVEALS

Using the our database, we identified 111 U.S. publicly traded companies that derived 20 percent or more of their annual revenues from the federal government.

While it is widely known that Defense, Healthcare and Social Security account for 63 percent of government spending (according to the White House Office of Management and Budget), pinpointing which companies and sectors will face the most headwinds is difficult without a precise map of revenue flows through the government supply chain.

Of the 111 U.S. listed companies we identified, we found that the median exposure was 40 percent. Healthcare and Defense companies clearly dominated the top government supplier list, but less obvious were the significant presence of Technology and Business Services companies.

Sectors

% of Companies

Healthcare

37.8%

Industrial Manufacturing - Defense

28.8%

Business Services

9.9%

Technology

14.4%

Of our group of 111 U.S.-listed companies that derive 20 percent or more of their revenues from the federal government, we identified the bottom three subsectors that have fared the worst in comparison to the S&P 500 in the run-up to the debt reduction discussions in Washington. They are:

Worst Performing Subsectors

YTD % Return

Advanced Combat Systems

-4.30%

Construction & Engineering Services

-3.17%

Defense Contractors

-3.02%

In order to find the companies within these sectors that have been most resilient to the pressure of the debt reduction talks, we calculated the average three-month and year-to-date (YTD) percent returns of these 111 companies and compared them to the S&P 500. As expected, the top government suppliers as a group have underperformed the S&P 500 by 4.5 percent and 1.0 percent in the past three months and YTD, respectively. Also evident is that much of underperformance happened in the last three months, a period when pessimistic speculation that the U.S. government may have to shutdown has intensified.
(Click to enlarge)

However, breaking down the supplier group into subsectors, we identified the three groups that have been more resilient in spite of these spending cuts discussions. They are:

  • Outpatient Care Facilities
  • Defense Electronics & Software
  • Outsourced IT & Business Services

Outpatient Care Facilities

Within the Healthcare sector, Outpatient Care Facilities outperformed the S&P 500 on a three-month and YTD basis by 5.4 percent and 18.6 percent, respectively. Companies within this sector include surgery centers, clinical diagnostic laboratories, and dialysis centers.
(Click to enlarge)

Outsourced IT & Business Services

Outsourced IT & Business services companies provide back office support and increased efficiency and productivity to government programs while also eliminating the costs of health insurance and pensions that they would otherwise spend on employees for private sector companies. Companies belonging to the Outsourced IT & Business Services sector have outperformed the S&P 500 in the past three-month and YTD by 2.4 percent and 10.0 percent, respectively.
(Click to enlarge)

Defense Electronics & Software

The one surprising bright spot among the companies within the wider Defense sector was found in the Defense Electronics & Software subsector. On a three-month and YTD basis, this group has outperformed the S&P 500 by 0.4 percent and 14.1 percent, respectively. Defense Electronics & Software companies produce highly specialized technology components that optimize the functions and productivity of expensive defense equipment, improving the functionality and lifespan of military equipment and systems.


(Click to enlarge)

CONCLUSION

  • Companies that develop superior technologies, increase productivity/efficiencies or contain costs, as well as reduce overhead and/or capital expenditures are better positioned to win business from both private sector companies and the public sector.
  • As spending cuts by the federal government loom, companies from the Outpatient Care Facilities sector, the Outsourced IT & Business Services sector, and Defense Electronics & Software sector have been bucking the trend of underperformance with YTD returns of 26.2 percent, 17.7 percent, and 21.7 percent, respectively.

Companies to Watch:

Outpatient Care Facilities

Name

Ticker

Market Cap. ($Mil)

3-Month Return %

YTD Return %

% Revenues from the Government

RadNet Inc.

RDNT

165

27.30%

57.09%

20.0%

U.S. Physical Therapy, Inc.

USPH

309

17.34%

32.09%

24.5%

AmSurg Corp.

AMSG

862

0.99%

31.70%

31.0%

Outsourced IT & Business Services

Name

Ticker

Market Cap. ($Mil)

3-Month Return %

YTD Return %

% Revenues from the Government

SRA International, Inc.

SRX

1794

0.42%

52.23%

93.0%

GP Strategies Corporation

GPX

260

-0.50%

35.16%

22.0%

CACI International Inc

CACI

1978

8.63%

23.03%

94.8%

Defense Electronics & Software

Name

Ticker

Market Cap. ($Mil)

3-Month Return %

YTD Return %

% Revenues from the Government

OPNET Technologies, Inc.

OPNT

918

8.21%

53.68%

39.9%

Teledyne Technologies Incorporated

TDY

1888

0.12%

16.92%

34.0%

FLIR Systems, Inc.

FLIR

5538

2.39%

16.57%

34.0%

Worst Performing Subsectors

Advanced Combat Systems

Ticker

Market Cap. ($Mil)

3-Month Return %

YTD Return %

% Revenues from the Government

Force Protection, Inc

FRPT

343

4.76%

-12.16%

87.0%

Oshkosh Corp

OSK

2800

-5.15%

-11.12%

72.0%

Construction & Engineering Services

Ticker

Market Cap. ($Mil)

3-Month Return %

YTD Return %

% Revenues from the Government

Jacobs Engineering Group Inc.

JEC

5300

-12.54

-7.83%

25.4%

Tetra Tech, Inc.

TTEK

1400

-4.92%

-9.78%

28.6%

Defense Contractors

Ticker

Market Cap.

3-Month Return %

YTD Return %

% Revenues from the Government

KEYW Holding Corp.

KEYW

303

-4.01%

-20.11%

95.0%

DigitalGlobe, Inc.

DGI

1100

-11.82%

-20.97%

62.6%

Jeremy Zhou contributed research and analysis for this report.

Source: Resiliency in the U.S. Government Supply Chain