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. 
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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. 
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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. 
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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.
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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. ($Mil) | 3-Month Return % | YTD Return % | % Revenues from the Government |
RadNet Inc. | 165 | 27.30% | 57.09% | 20.0% | |
U.S. Physical Therapy, Inc. | 309 | 17.34% | 32.09% | 24.5% | |
AmSurg Corp. | 862 | 0.99% | 31.70% | 31.0% |
Outsourced IT & Business Services
Name | Ticker | Market Cap. ($Mil) | 3-Month Return % | YTD Return % | % Revenues from the Government |
SRA International, Inc. | 1794 | 0.42% | 52.23% | 93.0% | |
GP Strategies Corporation | 260 | -0.50% | 35.16% | 22.0% | |
CACI International Inc | 1978 | 8.63% | 23.03% | 94.8% |
Defense Electronics & Software
Name | Ticker | Market Cap. ($Mil) | 3-Month Return % | YTD Return % | % Revenues from the Government |
OPNET Technologies, Inc. | 918 | 8.21% | 53.68% | 39.9% | |
Teledyne Technologies Incorporated | 1888 | 0.12% | 16.92% | 34.0% | |
FLIR Systems, Inc. | 5538 | 2.39% | 16.57% | 34.0% |
Worst Performing Subsectors
Advanced Combat Systems | Ticker | Market Cap. ($Mil) | 3-Month Return % | YTD Return % | % Revenues from the Government |
Force Protection, Inc | 343 | 4.76% | -12.16% | 87.0% | |
Oshkosh Corp | 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. | 5300 | -12.54 | -7.83% | 25.4% | |
Tetra Tech, Inc. | 1400 | -4.92% | -9.78% | 28.6% |
Defense Contractors | Ticker | Market Cap. | 3-Month Return % | YTD Return % | % Revenues from the Government |
KEYW Holding Corp. | 303 | -4.01% | -20.11% | 95.0% | |
DigitalGlobe, Inc. | 1100 | -11.82% | -20.97% | 62.6% |
Jeremy Zhou contributed research and analysis for this report.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
