ManTech International Corporation: A Small Cap with Big Prospects

ManTech International Corporation (MANT) is a leading provider of technologies and solutions for national security programs of the U.S. government, including the Department of Defense, the Intelligence Community, the Department of State, the Department of Justice, the Department of Homeland Security, and other federal government agencies. The investment thesis for ManTech is stated in a succinct and compelling fashion in this passage from the company’s 2005 Annual Report:

The protection of the homeland is a constant necessity and, unfortunately, the Global War on Terrorism is only in its early stages. Given our strong focus on defense, intelligence, national security and law enforcement markets, ManTech is uniquely positioned to support our government on all fronts. We believe this spending will continue to increase for the next several years, driven by the expansion of national defense and homeland security programs, the persistent need for sophisticated intelligence gathering and information sharing and an increased reliance on technology service providers. ManTech has the expertise, the skilled personnel and in many cases the unique technical solutions required to support these needs and we are well-positioned to maintain our growth trajectory.

The company has seen impressive growth in revenue, net income, and earnings per share. The figures given represent results from continuing operations:

The company has forecast 2007 earnings from continuing operations between 1.76 and 1.84 per share on revenue between 1.26B and 1.3B. Analysts’ estimate is 1.80 per share on revenue of 1.27B. Dilution does not seem to be a problem. The share count in 2003 stood at 32.2M, and the company is projecting a share count of 34.7M by the end of 2007 for an annual dilution rate of 2%. The balance sheet shows 41M in cash and no long-term debt. Stockholders’ equity stands at 459M.

The company has been generating increasing amounts of cash. Here are the figures, based on continuing operations, for free cash flow (net cash from operating activities less capex) and owner earnings (net income + D&A – capex):

The company has demonstrated impressive organic growth as well as the ability to grow through strategic acquisitions. Its purchase of Gray Hawk in 2005 resulted in a broadening of capabilities in intelligence analysis and counter-intelligence, surveillance and reconnaissance, and AI driven modeling simulation. In 2006, the company completed its acquisition of GRS solutions, which according to chairman and CEO George Pederson, added “further breadth to ManTech in the high-end intelligence arena and strengthens our position as a national security pure-play.” On April 9 of this year, the company announced that it would acquire SRS Technologies, an intelligence, defense, and homeland security firm. According to Pederson, “this acquisition is consistent with ManTech’s growth strategy to broaden our footprint in the high-end intelligence, homeland security, and defense markets. … Their long-term relationships with the DoD, the intelligence community, and special agencies such as DARPA, MDA, DIA, and other classified customers provide new opportunities for ManTech.” This is the largest acquisition the company has made since going public in 2002, and it greatly strengthens the company’s position as a leading player in the national security arena. The company will discuss the effects of this acquisition on its guidance estimates during its first quarter 2007 conference call scheduled for May 1.

With a market cap of 1.11B and 41M in cash and no long-term debt, the company carries an enterprise value of 1.07B. With TTM revenue of 1.14B, this gives an enterprise value to revenue multiple of .94. With 2007 revenue forecast at 1.27B, this gives a forward multiple of .84. With TTM owner earnings of 61M, this gives an EV/OE ratio of 17.5. TTM EPS (from continuing operations) stands at 1.64. With the share price currently sitting at 32.82, this gives a PE of 20. With 2007 EPS forecast at 1.80, this gives a forward PE of 18.2. Analysts are estimating growth at the rate of 14.5% per year over the next 5 years. This puts the PEG at 1.38 (1.26 on a forward basis) and (EV/OE)/G at 1.21. Return on equity is 13.4%, and the price per book ratio is 2.4.

A DCF calculation produces a fair value share price of 38.23 under the assumption of 14.5% growth over the next 5 years, 3% growth thereafter, and with an 11% discount rate. The current price represents a 14% discount to this DCF fair value. A reverse DCF calculation shows the current price to be fair value under the assumption of 10.5% growth over the next 5 years, 3% growth thereafter, and with an 11% discount rate. Given the rate of growth achieved over the last 3 years and the projected rate of growth over the next 5 years, the company stands a good chance of handily beating a 10.5% growth rate. The various ratios considered together with the DCF calculations suggest that the current price is quite attractive.

Full disclosure: Long MANT at time of writing. The author intends to purchase more shares within three days.