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2001 BW 50

SPRING 2002

STREET WISE

CACI: Aggressive Growth in Defense
This military IT company uses brainpower, not metal-bending, to produce powerful returns for investors


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CACI International doesn't make glitzy jet fighters, ships, tanks, or smart bombs. What the Arlington (Va.) defense information-technology company does make is money -- lots of it for investors. CACI (CACI ), which ranks No. 3 on this year's Standard & Poor's Small-Cap 600 list, notched a one-year return of 178.5% and a three-year return of 328.3%.


An acquisition binge and CACI's focus on the military's insatiable info-tech needs helped the company post these stellar results. Its stock price, adjusted for a two-for-one split, soared from $13.50 a year ago to as high as $42 in December before falling back to around $36, after a sale of 4.25 million new shares to the public potentially diluted earnings.

CACI, which has completed 18 acquisitions since 1992, says the $150 million war chest it has from the stock offering will be used to pay down debt and make more purchases. The acquisitions are expected to be in its current niche, which includes providing the Pentagon with software, network-management, systems-integration, and information-security services. The company also is looking at IT support for space systems, such as satellites and sensors, where the military plans to spend more money.

TROUNCING RIVALS.  The Defense Dept. accounts for roughly two-thirds of CACI's revenue, and analysts say being that dependent on the military isn't a bad idea, as the commercial end of the business remains soft. "Defense is obviously a hot growth area," says Michael F. Legg, senior vice-president of Jeffries & Co.

The industry's propects also helped CACI's neighbor, Falls Church (Va.)-based General Dynamics (GD ), make the BusinessWeek 50 for the third straight year. But CACI's one- and three-year returns dwarf General Dynamics'. The larger defense contractor had a 35.1% one-year return and 59.5% three-year return, which were good enough to vault it into the No. 16 position in the BW50 -- but look meager in comparison to CACI's returns.

Analysts think CACI can keep up its momentum. Since 1997, sales and profits have risen 21% a year, to $20.8 million in earnings on $563.8 million in revenue in 2001. A Thomson Financial/First Call survey of analysts forecasts that per earnings per share will rise steadily from 90 cents in 2001 to $1.27 this year, $1.50 next year, and $1.71 in 2004.

Part of the bullishness may stem from the fact that CACI gets much of its funding from the Pentagon's huge operations and maintenance account, rather than from the smaller procurement account. The Bush Administration wants the operations and maintenance budget to jump almost $23 billion in 2003, to $150.4 billion, while procurement in the defense budget is slated to climb at a far slower clip, rising $6.6 billion, to $68.7 billion.

STIFF COMPETITION.  Acquisitions also will play a big role in CACI's future growth. While deals often are paid for in stock because debt is viewed as more expensive than equity, for CACI, the equation is different in the current environment. "Debt is simply cheaper than equity," says Chairman and CEO Jack London.

So CACI will pay cash for its purchases and pay down the debt as rapidly as possible. Analysts agree with London's assessment of previous transactions -- that while "not all of them brought down the chandeliers with success," as he puts it, there have been "essentially no failures."

There are a few clouds on the horizon. Analyst Legg has cut his 2002 earnings forecast by 15 cents, to $1.40, because of the recent stock offering. He's waiting to see if the acquisitions make that money back. And CACI will face stiff competition going forward.

"HEAD START."  Until a few weeks ago, it was the only pure stock play in the IT defense sector. But some other companies are now entering the fray, crossing the key threshold of access to public markets to assure their survivability. Mantech International (MANT ), Anteon (ANT ), SRA International, and Veridian all have gone public or recently filed plans to do so.

Still, CACI has the advantage of more than three decades as a public company. "They've got a running head start," notes Jon Kutler, chairman and CEO of Quarterdeck Investment Partners, an investment banking company that specializes in the defense industry. With the market growing and the flexibility CACI has through reliance on brainpower rather than metal-bending, Kutler adds, "it should be able to do well."

Editor's Note: Since this story was originally published, CACI posted record third-quarter profits and offered bullish guidance for 2003, but that was too much good news for investors, who drove down the Arlington (Va.) defense contractor's stock price from about $36 to the $33 range in mid-June. In late April, CACI said third-quarter (ending Mar. 31) earnings from continuing operations jumped 58%, to $8.6 million, on revenue of $182.8 million, a 25% increase. On May 29, it projected that 2003 revenue would rise as much as 23%, to $830 million, while net income would rise to as much as $42.5 million, up 33%.

In an unusual move on Apr. 24, CACI corrected the consensus of analysts' earnings projections. It apparently felt it had to do so because when some analysts calculated earnings per share, they had forgotten to include CACI's secondary offering earlier this year in the total number of shares. The recalculation reduced the earnings per share figure.


MARCH 25, 2002



By Stan Crock

Edited by Beth Belton

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