KEYW: Still Long On Acquisitions, Short On Contracts

| About: KEYW Holding (KEYW)

As my poker buddy says when he makes a good read on an opponent's hand: "I love being right."

In my bearish KEYW article back in March, I stated that I didn't believe the company would get the much hoped for AURA contract with the National Security Agency (NSA). My main thesis was just because the team on KEYW had connections with the NSA from their previous company, their previous products were niche, whereas the AURA contract isn't niche. It is a huge endeavor of moving the NSA's systems to the cloud. A small, new company like KEYW can't compete with the larger, established government technology companies.

In the after market yesterday, KEYW's CEO, Leonard Moodispaw, confirmed that the company indeed had lost the contract.

"While the award of the Aura contract to a competitor is disappointing, we continue to see abundant opportunities for continued high growth," said Moodispaw, the company's president and CEO, in a statement.

Really? Now when Mr. Moodispaw talks about high growth, does he mean artificial growth through more acquisitions or organic growth through new contracts?

Moodispaw is an expressive CEO who doesn't miss an opportunity to report good news on his company. Looking at the company's press releases of the year, KEYW achieved only one new contract, a tiny $16 million one, and from what I hear Moodispaw praised his company up and down for getting it.

Looking at the other press releases, all I see are more acquisitions, financial results, and a Board of Director resignation. When making acquisitions, usually the acquiring company has to pay more than the company is currently worth, but expects to get more contracts because of the aquiring company's connections and innovations. The missing ingredient here for KEYW is the more contracts.

Back in March, as I was collecting information for my article, I interviewed an analyst who was a KEYW bull. He thought KEYW would get the AURA contract, which would be an initial $700 million in revenue for the company over seven years, plus add ons, which would probably come out to more than $1 billion in revenue. He agreed that achieving the AURA contract is a binary event, and would be the difference between the penthouse or the doghouse for KEYW.

I had covered my short awhile back after my first article. But I renewed it today as I write this on 9/27/11, at an average price of $8.15. I think this AURA contract is more of a binary event than the market is pricing in. As I write this, KEYW is at $7.70, down 22%. There isn't much margin of safety to short here, but I still think one can pounce on weakness and short it down to $7 a share. It's unlikely KEYW will achieve any new contracts anytime soon, as none are reportedly on the horizon. In this anti-military spending government, a small company like KEYW doesn't have much of a chance to compete.

Disclosure: I am short KEYW.