VSE Corporation Continues to Perform

In a previous article I took an initial look at VSE Corporation (VSEC), a small and obscure defense-related company. The last several years have seen impressive growth in revenue, net income, and earnings per share. On Friday, the company reported results for the first quarter of 2007, and these results show continued impressive growth in each of these categories. Revenue grew by 91% to 120.7M, net income grew by 84% to 2.7M, and EPS grew by 84% to 1.12. The number of diluted shares grew by less than half a percent.

It is instructive to examine the company’s funded backlog. As noted in the 2006 Form 10-K, the “funded backlog for government contracts represents a measure of the Company’s potential future revenues and is defined as the total value of contracts that has been appropriated and funded by the procuring agencies, less the amount of revenues that have already been recognized on such contracts.” As of December 31, 2006 the company’s funded backlog stood at 299M. The company booked 205M in the first quarter of 2007 and recorded revenue of 121M. This has resulted in a funded backlog of 384M as of March 31, 2007, a 47% increase over the funded backlog of 262M for the year-ago quarter.

The market reacted positively to the earnings release, propelling the share price up 8% to 49.52 on 10 times the normal daily volume. With trailing EPS sitting at 3.72, the stock now trades at a PE of 13.3 making it a better value than it was just prior to the earnings release when the PE was 14.3. Given that over the last 3 years, net income has been growing at an annualized rate of 57%, this puts the PEG at .23. With even half that growth rate in earnings, we still have a very attractive PEG of .47. The press release does not contain a balance sheet or a statement of cash flows. We will have to wait for the 10Q to be posted for a more thorough look at the quarterly results and for the information needed to consider other aspects of valuation.

Disclosure: Author has a long position in VSEC

VSEC 1-yr chart