Company Overview: A technology integrator company, CACI International, Inc. (NYSE: CACI), is involved in offering high-end solutions in engineering, IT, and mission solutions throughout the defense, space, civilian, and intelligence markets. The company’s solutions augment defense and intelligence capabilities, improve decision-making, assure homeland security, and help customers to operate smartly and competently. CACI faces intense rivalry from Science Applications in the federal space.

CACI Details

CACI Rides on Customer Wins & Strategic Alliances: CACI International, Inc. (NYSE: CACI) is engaged in offering information technology-based applications and infrastructure to boost communications and secure the consistency of information systems and networks, increase efficiency and mission effectiveness, thereby boosting data collection and analysis. The company reported FY20 revenues of $5,720 million, which increased 14.7% from the prior corresponding period. Revenue was primarily driven by acquired business, new business wins and contracts growth. The company witnessed organic growth of 8% in FY20, as compared to 2.8% in FY19. The company operates under four customer groups namely Department of Defense (DoD), Federal Civilian Agencies, Commercial and Other, and State and Local Governments.

The company remains on track to benefit from its large pipeline of government projects. In FY20, the company delivered robust results with higher organic growth, continued margin expansion, and healthy cash flow. Robust program implementation, new contract wins, expansion of existing work, efficient management system aided the results. The company also won several contract awards, with a record level of the backlog at the end of the year. CACI has been winning a record level of awards, which indicates its efficient business development actions, stable operational excellence, and high customer satisfaction. The company’s reliability with contracts makes it an ideal choice among contractors. Going Forward, the company expects to benefit from increasing organic revenue growth and continued margin expansion. Notably, the company’s EBITDA margin came in at ~10% in FY20, despite COVID-19 led headwinds.

Although the competition from Science Applications and IBM in the IT services space remains steady, the company remains comfortably positioned in this space, given its favored relationship with the Department of Defense (DoD). Furthermore, cyberattacks are generating heightened consciousness, leading to more demand for cybersecurity solutions. In FY20, the company purchased three companies namely – Next Century Corp., Linndustries Shielding Specialties, and United Kingdom-based Deep3. The acquisition is in-line with the company’s strategies to add data analytics and data fusion, cybersecurity, digital transformation, and electromagnetic to its portfolio.

The company is in a competitive position in the market given its robust scale, size, and prime contractor leadership, particularly on large contracts. Recently, the company acquired Ascent Vision Technologies, LLC. The move will aid the company to increase its reach in the multi-domain intelligence, surveillance, and reconnaissance (ISR) operations. The buyout is expected to be a key driver in implementing its long-term strategy and deliver sustained profitable growth. Looking ahead, CACI is set to gain from several government contracts. The company witnessed a CAGR of 11.2% and 22.4% in revenue and net income, respectively over the period of FY2016-FY2020.

Key Trends (Source: Company Reports)

Increase in Top & Bottom Line in FY20: In FY20, CACI reported earnings of $12.61 per share, up 20.6% from the previous corresponding period. Revenues for the period came in at $5.7 billion, up 14.7% on a year over year basis, owing to new business wins, acquired contracts and on-contract growth. Organic revenue during the period grew at 8% on a year over year basis. Contract awards in FY20 were worth $11.6 billion, of which approximately 55% came from new businesses. In terms of customer mix, the Department of Defense, Federal Civilian Agencies and Commercial and other customers contributed 69.9%, 25.7%, and 4.4% of total revenues, respectively, during the year. During the year, operating income came in at $457.7 million, up 21.1% year over year, owing to higher revenues as well as lower indirect costs and selling expenses. Adjusted EBITDA came in at $573.6 million, up 22.7% year over year.

FY20 Key Highlights (Source: Company Reports)

Healthy Balance Sheet and Decent Liquidity: The company reported FY20 gross margin at 35%, higher than the industry median of 47.9%. EBITDA and Operation Margins stood at 9.9% and 8%, respectively, in FY20, higher than the year-ago figure of 9.3% and 7.6%, respectively. ROE, in the same time span, stood at 12.8%, higher than FY19’s figure of 11.7%. FY20 debt to equity ratio stood at 0.53x, lower than the year-ago figure of 0.70x, depicting a sound financial position. The company remains on track to deleverage its balance sheet in the coming times. Cash balance at the end of FY20 of $107.2 million and total long-term debt amounted to $1.36 billion. Cash flow from operations stood at $518.7 million, owing to growth in net income and lower DSO (Days sales outstanding). FY20 net cash provided by operating activities excluding MARPA of $511 million, was up 41% year-over-year. Leverage ratio for FY20 stood at 2.3x. The company remains on track to continue investing in key areas with robust cash flow and borrowing capacity. This provides the company with ample available liquidity for unforeseen events.

Key Metrics (Source: Refinitiv, Thomson Reuters)

Contract Wins - a Key Catalysts: The company has gained significantly from new business wins and a large pipeline of government projects. Recently, the company won 4 years and 10 months contract for a consideration of $59 million, to aid Defense Finance and Accounting Service's Comptroller critical mission systems by providing the latter with enterprise expertise and technology services. Further, the company also won a six-year single-award contract, for a consideration of over $152 million, by the Department of Veteran Affairs to deliver enterprise expertise in support of the department’s Financial Management Business Transformation Program (FMBT).  It also won a five-year, single-award task order, with a ceiling value of ~$128 million, to provide mission expertise to the U.S. Army Program Executive Office for Soldier (PEO Soldier) on maneuver. Other contracts won by the company include a $1.5 billion, single-award Indefinite Delivery/Indefinite Quantity (“IDIQ”) contract to provide its enterprise Information Technology, transport, and cybersecurity services to the National Geospatial-Intelligence Agency (NGA) and its partners. 

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 40.74% of the total shareholding. The Vanguard Group, Inc. and BlackRock Institutional Trust Company, N.A. holds the maximum interests in the company at 10.57% and 8.25%, respectively.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Risk Analysis: A highly leveraged balance sheet might weigh on the company’s financial performance, going forward. As of June 30, 2020, the company’s cash and cash equivalents were $10.7.2 million, while total long-term debt (net of current portion) was $1.36 billion. The company is also heavily dependent on U.S. government agencies as its primary customer, as a result, the loss of any of these agencies could adversely impact the company’s revenues and cash flows. Additionally, competition from peers, challenges of COVID-19, and the global threat environment add to the woes.

Outlook: In FY21, the company expects AVT to add $50 million in revenue and $20 million in adjusted EBITDA. Post the transaction has closed, the company expects adjusted EBITDA Leverage to be 2.8x. The company expects to support government customers, given its mission-critical work, long-term contracts, a flexible operating model, and cost structure, which in turn will aid the company’s growth, going forward. In FY21, the company expects to remain resilient, and profitable by taking necessary steps to invest higher in key planned areas. For FY21, the company expects revenues to be between $6-$6.2 billion. Earnings per share are likely to be in the ambit of $13.50 and $14.28 in FY21. Net income is expected to be between $347-$367 million and net cash provided by operating activities is likely to be a minimum of $580 million.

FY21 Outlook (Source: Company Reports)

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)

EV/EBITDA Multiple Based Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The stock of CACI closed at $209.98 with a market capitalization of ~$5.27 billion. The stock made a 52-week low and high of $156.15 and $288.59, respectively, and is currently trading above the average of its 52-week trading range. On the technical analysis front, the stock has a support level of ~$202.44 and a resistance level of ~$241.52. The stock went down ~11.9% in the last six-months period. CACI is likely to benefit from a robust product portfolio, which, in turn, will boost the top-line and support the growth. The company’s capability to maintain its existing contracts along with the newly awarded ones throughout the customer portfolio is expected to be a tailwind, going forward. Considering the above factors, we have valued the stock using an EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price with an upside of lower double-digit (in % terms). For the purpose, we have taken peers like Science Applications International Corp (NYSE: SAIC), Booz Allen Hamilton Holding Corp (NYSE: BAH), Leidos Holdings Inc (NYSE: LDOS), to name a few. Hence, we recommend a “Buy” rating on the stock at the closing price of $209.98, down 2.55% on 19 October 2020. 

CACI Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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