VSE Corp.: Quite Attractive at Current Price

Jul.20.08 | About: VSE Corporation (VSEC)

Let’s first take a quick look at how VSE Corp. (NASDAQ:VSEC) has been doing over the last 5 years and then look at the results of the first quarter of 2008.

Revenue has trended as follows:

2003: 133.1M

2004: 216M

2005: 280.1M

2006: 363.7M

2007: 653.2M

During this period, revenue has been growing at an annualized rate of 49%.

Net income has trended as follows:

2003: 2M

2004: 3.4M

2005: 6.2M

2006: 7.8M

2007: 14.1M

During this period, net income has been growing at an annualized rate of 63%.

Diluted EPS has trended as follows (adjusted for June, 2007 stock split):

2003: .45

2004: .75

2005: 1.29

2006: 1.61

2007: 2.82

During this period, diluted EPS has been growing at an annualized rate of 58%.

Funded backlog has trended as follows:

2003: 83M

2004: 168M

2005: 276M

2006: 299M

2007: 408M

During this period, funded backlog has been growing at an annualized rate of 49%.

On April 29, the company reported the results of for the first quarter of 2008. On a year-over-year basis, revenue grew 56%, net income grew 32%, diluted EPS grew 27%, and funded backlog grew 48%.

Here are some considerations which will give us some idea of the current valuation:

Market cap: 164.5M

Share price: 32.47

Enterprise value: 158.1M

TTM EPS: 2.97

PE: 10.9

TTM owner earnings: 9.3M (computed as net income + D&A – total capex)

EV/OE: 17

The PE and EV/OE figures are quite low in comparison with the growth rates this company has been experiencing. This suggests that the current price is quite attractive.

A reverse DCF calculation, using an 11% discount rate, shows that the current price is based on the assumption of 16% annual growth for 5 years and no growth thereafter. If we assume a 3% growth rate after year 5, then the current price reflects an assumption of 10% growth over the next 5 years. By these measures as well, the current price appears quite attractive.

Disclosure: Long