DLH Holdings Has A Path To More Upside

Apr. 09, 2018 12:10 PM ETDLH Holdings Corp. (DLHC)
Vince Martin profile picture
Vince Martin


  • Federal government contractor DLH has executed an impressive turnaround, with a multi-year history of revenue growth and margin expansion.
  • Growth continues, including in a strong fiscal Q1 (December) quarter.
  • Valuation is reasonably high, and federal government risk seems an issue.
  • But DLH's key programs seem relatively well-positioned, and a continuation of the strategy should lead to more upside - as long as current trends hold.

Micro-cap government contractor DLH Holdings (NASDAQ:DLHC) has executed an impressive turnaround over the past few years:

Source: DLH Q4 earnings call presentation

That said, the market has noticed:

ChartDLHC data by YCharts

And I wrote early last year that DLHC seemed to have priced in the turnaround - and then some. The 2016 acquisition of Danya added scale, and diversified the company away from a ~95% reliance on the Department of Veterans Affairs. But DLHC didn't look particularly cheap, particularly given still-heavy concentration and potential risk from the new Administration in D.C.

But fifteen months later, with DLHC at pretty much the same price, I'm more intrigued. DLH's business continues to improve, despite some concerns on the margin front. Existing programs seem relatively safe, and investments made of late should set the company up for further top line growth going forward. A strong fiscal Q1 report in February supports the case as well.

The question at the moment is whether DLHC is quite compelling enough to put money behind. But with the valuation relatively reasonable on a free cash flow basis, M&A optionality, and steady revenue growth, there's enough to at least give the stock a long look, and to expect that DLHC's upward trend will resume at some point.

Strong Results And The Bull Case

The case for DLHC, at its core, is that current trends are going to hold. Organic revenue in FY17 (ending September) rose 6.3%, per figures from the 10-K. The K cites increased spending on existing contract, and management has mentioned help from smaller, one-off deals, over the past few quarters.

Growth then accelerated to an impressive 15.7% (all organic, as the Danya deal has been lapped) in Q1. Per the Q1 call, there was a bit of one-time help, including the slippage of Head

This article was written by

Vince Martin profile picture
Overlooked Alpha launched April 2022 - subscribe at overlookedalpha.com. Some OA articles are also available here at Seeking Alpha.I've been contributing to Seeking Alpha and other investment websites since 2011, with a general (though far from rigid) focus on value over growth. I got my Series 7 and 63 back in 1999, and watched the dot-com bubble peak and then burst in real time at a small, tech-focused retail brokerage in NYC.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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