One of the first reasons to like Versar, Inc. (AMEX: VSR) is the fact that they participate in three of today's hottest markets: Defense, Infrastructure and Environmental Services, three of our favorites. VSR has also spent the last few years transitioning from a consulting company to a more profitable project/program management company and FY07 results indicate the move is paying off.
We believe VSR is uniquely positioned to take advantage of an early-stage spending spree across all three of these markets. Two of the biggest multi-year catalysts include long delayed, multi-billion $ spending for the U.S. Base Realignment and Closure of 2005, or BRAC-2005; and, ever-increasing reconstruction and infrastructure work in Iraq and neighboring countries.
BRAC-2005 became law a year ago, but the DoD has just begun the process of initiating these mandated changes required before September 2011. The environmental remediation portion alone is estimated at over $6.5 billion and VSR received its first two BRAC-related awards this summer. Iraq, Afghanistan, Kurdistan, etc. is another story. VSR is involved in 100 project sites throughout Iraq, and the task orders just keep coming. Since announcing record backlog levels, VSR has reported no less that 3 new contracts/task orders in the Middle East totaling over $48 million... all to be paid within a year.
At the end of FY07 (June), VSR reported $57 million in funded backlog, just shy of a Company record, and $503 million in total backlog (funded + expected). FY07 was also a record in terms of revenues and earnings. Since closing out a record FY07, VSR has announced a whopping $91.1 million in new awards, not included in the Jun-07 backlog figure. Roughly $50 million is for awards within the next 12 months.
- Strong double-digit trailing growth, well ahead of peers
- Strong forward-looking growth, well ahead of peers
- Record backlog growing by leaps and bounds
All this, and VSR still trades at a serious discount to peers. We believe VSR's valuations are far too low whether based on trailing results or forward-looking estimates, and we believe the Company will continue reporting great numbers and continue reloading their pipeline. If this theory holds true, VSR could easily double or triple over the next few years before reaching "fair value."
On November 5, 2007, we published our initial research report to our subscribers. The complete report, available online, provided the following research bullet points:
- PROFILE – Versar, Inc. is a global professional services firm that provides the government and the private sector with value-added, high quality innovative solutions for infrastructure, facilities management, construction, environmental quality, defense and homeland security needs.
- POSITIONED – Uniquely Positioned for a 3-5 Year Project Spending Spree
- BRAC – Just 3 Years to Complete $Billions of Work Mandated by BRAC 2005
- IRAQ – Ever-Increasing Reconstruction and Infrastructure Work in the Middle East
- RECORDS – Record Revenues, Record Profits, Record Backlog... Record Opportunity
- VALUATIONS – Reminder from the Past... VSR's Valuations have it Primed for Appreciation
- RISKS – Government Work is a Two-Edged Sword, Plus Tax Benefit Confusion
UPDATE: On November 12, 2007, VSR reported an impressive +30% increase in 1Q08 revenues to $28.9 million. First quarter net income increased +68% to over $1 million, or $0.11 per share. Funded backlog for the quarter ended September 28, 2007 hit a new all-time record of $91 million, up +60% from the previous quarter.