VSE Continues To Deliver

A couple of days ago, VSE Corporation (VSEC) reported its results for the second quarter of 2007.  Revenue grew 68%, net income grew 75%, and diluted EPS came in at $0.71, up 69% from the year-ago quarter.  Funded backlog as of June 30, 2007 is 372M.  This represents a nice rise over the funded backlog of 299M at December 31, 2006 and 264M for the year-ago quarter.  Bookings for the first half of 2007 were 321M compared to revenues of 280M for the same period.  Owner earnings, (defined as net income + D&A – capex) for the six months ended June 30, 2007 grew 103% over the figure for the year-ago period.

The current market cap is 245.4M corresponding to a stock price of 50.48.  Cash on the balance sheet has decreased due to the acquisition of ICRC, but the company still has no debt.  With an enterprise value of 244.1M and TTM revenue of 485.9M, the enterprise-value-to-revenue ratio stands at .5.  Diluted EPS (on a TTM basis) is 2.16, giving the stock a PE of 23.

Based on the results for the first half of 2007, the owner earnings run rate for 2007 is 10.7M.  Although an estimate, this can be regarded as a somewhat conservative figure since a more accurate picture of the cash generation potential of the company might be obtained by adding back the portion of capex allocated to growth.  With this level of owner earnings we have an EV/OE ratio of 23.  Using this owner earnings figure, along with a growth phase of five years, a terminal growth rate of 3%, and an 11% discount rate, we have the following estimations of fair value:

Growth Rate	Fair Value
10%	38.07
15%	46.36
20%	56.12
25%	67.55

Baked into the current price is an assumption of 17% growth.

The stock is not nearly as cheap as it was three months ago when the market, or at least some folks therein, began to notice in VSEC an undervalued fast-growing micro cap company.  The 121% rise in price which has occurred since then has brought the price to something near, but perhaps not quite at, fair value. 

Disclosure: Author is long VSEC