Dynamics Research Posts Less Than Dynamic Results

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Small Cap Watch List member Dynamics Research (NASDAQ:DRCO) issued their earnings news release:

Dynamics Research Corporation, a provider of innovative engineering, technical and information technology services and solutions to federal and state governments today announced operating results for the fourth quarter and full year ended December 31, 2006. The company reported revenue for the fourth quarter of 2006 of approximately $60.3 million, consistent with previously issued guidance of $59 to $62 million. Net income was $1.5 million, or $0.16 per diluted share for the fourth quarter of 2006, compared with $0.31 per diluted share for the same period a year ago. For the year ended December 31, 2006 revenue was $259.0 million, compared with $300.4 million for 2005. Net income was $4.1 million, or $0.43 per diluted share for 2006, compared with $11.4 million, or $1.24 per share for 2005 which included $0.13 of non-recurring gain from the sale of investments.

Wall Street analysts were expecting the company to earn $0.13 on $60 million in revenue, so it was indeed in line. Their guidance looks light on the revenue side, but appears to blow out earnings estimates. “We are focused on achieving continued success from our business development initiatives while concurrently expanding profit margins,” said Jim Regan, DRC’s chairman and chief executive officer.

The company estimates revenues in the range of $225 to $240 million and earnings per diluted share in the range of $0.65 to $0.75 for the calendar year 2007. For the first quarter of the 2007 the company anticipates revenues in the range of $53 to $55 million and earnings per diluted share of $0.11 to $0.13.

Consensus estimates were pegged at $0.52 on $243 million in revenue for the full year and $0.11 on $60 million in Q1. In 2006 new business wins, measured in the estimated first year revenue value of contracts, grew by more than 50%. Total estimated value (all years) of new business contract wins was $145 million in 2006.

Sales are down considerably from a year ago, and the working capital accounts have been scaled back accordingly. New orders were less than sales for 2006, so further slowdown is to be expected. However, trading at an enterprise value of less than 6x EBITDA and 8x free cash flow, the stock appears reasonably priced even if sales decline modestly.

DRCO 1-yr chart:

DRCO 1-yr chart

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Tagged: , Business Software & Services, Earnings
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