When I first took a look at VSE Corporation (NASDAQ:VSEC), I saw a very promising company which was trading at a fraction of any reasonable definition of fair value and which was almost totally ignored by investors. Now, a mere four months later, the stock has risen 157% and the average number of shares traded per day has more than tripled on a split-adjusted basis.
In early June, I ran a valuation of VSEC. In light of the significant price appreciation which has occurred even since then, it's time to update the analysis.
The share price currently stands at 53.55. The company sports a market cap of 260.4M and an enterprise value of 243.7M. With TTM revenue of 480.1M, we have an enterprise value to revenue ratio of .5. Owner earnings, defined as net income plus depreciation and amortization minus capital expenditures, stands at 10M on a TTM basis. This gives an enterprise value to owner earnings ratio of 24.
Given that the company has been growing earnings at an annualized rate of 57%, the EV/OE multiple of 24 suggests that the current price may still be attractive. Indeed, if we assume only half that growth rate over the next several years, we still have (EV/OE)/G coming in at less than 1. A DCF calculation based on 25% growth over the next five years, 3% terminal growth, and a discount rate of 11% yields a fair value of 66.31. The stock is currently trading at a 19% discount to this fair value. Reverse engineering a DCF calculation shows that the current price reflects an assumption of 19% growth.
Thus, despite the remarkable rise we have seen in the stock price, it would appear that the stock is still trading at a modest discount. Results for the second quarter of 2007 are due any day now. Although we don't yet know what the company will report, one thing is clear. There will be a lot more people paying attention than at any time in the past.
Disclosure: Author has a long position in VSEC
VSEC 1-yr chart