According to defense firm ManTech (Nasdaq:MANT), the U.S. defense budget of $708 billion for 2011 will be cut by more than 5% to $671 billion in 2012. Further needs to stem the budget deficit could mean more defense cuts going forward while less activity on overseas missions will also lower demand. As such, finding companies with growth potential is becoming more difficult. ManTech’s focus on cyber security and fighting terrorism could make it an appealing outlier in the shrinking defense market.
ManTech offers technology solutions for programs it considers to be mission-critical in defense departments for the federal government. These departments include Defense, State, Homeland Security, Justice and the FBI. Its operations help the government defend against terrorists, maintain cyber and information security, and protect borders.
The company states it has grown rapidly since the terrorist attacks of 2001. Growth stems from internal means as well as from a steady acquisition program. Last year, it spent almost $370 million to purchase three major acquisitions to beef up its services to the Army, Marines and the U.S. Missile Defense Agency. Over the past decade, sales have advanced at a very annual clip of more than 21%. Annual profit growth has been more modest at 8.5% over this period, but has ramped up as earnings have expanded at nearly 21% annually over the past three and five year periods. Sales growth has remained above 21% over this time frame.
Operating margins have been consistently above 8% over the past three years while return on invested capital was strong at close to 14% for all of 2010. ROIC has remained in the double digits since 2002. (For related reading, see Analyzing Operating Margins.)
For all of 2011, ManTech currently anticipates sales of $3 billion, or about 15% ahead of last year’s levels. It expects net income of $138 million and diluted earnings of $3.73 per share for year-over year growth of about 9%.
Given the historical growth track record, shares of ManTech look very reasonably valued at a forward P/E of 12.3. It considers its peer group to be CACI International Inc (Nasdaq:CACI), NCI, Inc. (Nasdaq:NCIT) and SRA International, Inc. (NYSE:SRX), all of which trade for higher forward earnings multiples. Its rivals have also grown sales rapidly in recent years but haven’t matched ManTech in terms of sustainable earnings growth. Additionally, none of these firms pay a dividend while ManTech has a decent current yield of 1.9%.
Overall, ManTech offers an appealing mix of growth at a reasonable valuation and has managed to beat its peers on a number of important investment metrics. It also has appeal over giant defense firms as ManTech’s businesses should be more stable given they serve cyber defense and terrorism prevention functions. In contrast, the largest players such as Northrop Grumman (NYSE:NOC) and Raytheon (NYSE:RTN) are more susceptible to defense budget cutbacks given their larger size and exposure to fighters, ships and other supplies that will see less demand as operations are wound down in Iraq and Afghanistan. (For related reading, see Economic Moats: A Successful Company’s Best Defense.)