VSE Corp.: Quite Attractive at Current Price

Let’s first take a quick look at how VSE Corp. (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

Comments

[The Hammer]

It appears that this company has a higher level of cap ex to maintain this growth. At what point does cap ex level out?

[RobertBlumenthal]

The Hammer,

Their capex does exceed depreciation expense indicating that they are growing. For the first half of 2008, net income was 8.4M, depreciation expense was 2.3M and capex was 3.7M, leading to owner earnings of 7M. So, yes, they appear to have a level of capex consistent with a growth trajectory. Just when that will level out and they become a mature company is hard to say. I don't think it's going to be anytime soon since they have a lot of growth potential. We will begin to suspect they are reaching a mature phase when capex and depreciation expense are close to being equal.