2023-09-25 16:47:43 ET
Summary
- CACI International is a provider of technology and expertise to national security and government modernization efforts.
- The company derives 72% of its revenue from defense-related customers, particularly in the Intelligence Community.
- CACI had a successful fiscal year with 8% YoY revenue growth, a 10.7% EBITDA margin, and $282 million in free cash flow.
- According to my calculations, the stock is less than 10% undervalued.
- I'd like to revisit my thesis if CACI corrects 15-20% from its current price levels. Until that happens, the stock is a Hold.
The Company
CACI International Inc. ( CACI ) is a provider of expertise and cutting-edge technology to both enterprise and mission customers, with a specific focus on supporting national security and government modernization efforts. About 72% of the revenue is derived from defense-related customers, particularly in the Intelligence Community ((IC)), and the remainder comes from non-defense IC, homeland security, and other federal civilian customers:
I wrote about CACI in May of this year and concluded then that the company was strong enough and of high quality, but the valuation premium at the time made it impossible to say that the stock had enough growth potential to warrant a Buy recommendation. It was a strong Hold, so to speak. Time has shown that while CACI has not outperformed the S&P 500 Index ( SPX ) in the last quarter, at the same time the stock was quite stable in terms of its price action.
Seeking Alpha, my coverage of CACI stock
I suggest analyzing the company's recent financial results in more detail to determine the overall trends, financial health, and outlook for business performance. It will also be interesting to determine how much of CACI's growth potential has changed based on the updated data.
From its 10-K filing , I see that CACI had a successful fiscal year FY2023 with an 8% YoY revenue growth rate, a 10.7% EBITDA margin, and $282 million in free cash flow. They secured over $10 billion in contract awards, including significant contracts such as the $5.7 billion Enterprise IT as a service (EITaaS) contract for the Air Force. A few days after the release of the 10-K, we can also see that the company has continued to expand its existing backlog by signing new contracts, which I believe indirectly indicates the demand for the company's products in the defense industry as well as the effectiveness of the firm's sales team.
SA News, author's notes
The company has been focused on strategies to drive FCF/sh. growth, including share repurchases, acquisitions, and efficient cost management, the executives noted during the latest earnings call . And if you look not only at the words, but at the actual results of the work done, it seems to me that the management has completely coped with the task: EBITDA margins increased by 41 b.p. YoY in FY2023, and the share count decreased by 1.26% [also YoY].
But FCF per share dropped quite significantly in FY2023:
Why?
Despite net profit growth of 4.9% year-over-year, the reduction in deferred income taxes item on the balance sheet weighed on the operating cash flow, drastically reducing the FCF for the reporting period:
From the notes in the 10-K, I understand that the company may pay less income taxes in FY2024, which may contribute to higher net income and potentially better financial performance.
During the earnings call, the management said CACI had a favorable FY2023 government budget, and they are optimistic about the upcoming FY2024. They anticipate growth, projecting revenue between $7 billion and $7.2 billion, a high 10% EBITDA margin, and at least $400 million in FCF [that's ~5.7% in terms of forward FCF yield]. With a robust backlog, extensive pipeline, and expected revenues from existing programs, new tenders, and new business opportunities, CACI stock appears poised for continued success in FY2024, valuation permitting.
The Valuation and Expectations
Wall Street analysts agree with management's FY2024 revenue forecast - their consensus of $7.13 billion is actually slightly above the average of the guided range. In terms of earnings per share, analysts see 6.43% year-over-year growth, which implies a P/E of 15.5x for FY2024 for CACI:
Historically, the company's actual results have been quite variable when it comes to EPS surprises: CACI has met the Street's expectations an average of 50% of the time over the past 2 years:
So I think it's correct to assume that the analysts are right about the EPS growth of CACI for FY2024. If we then assume that the implied P/E of ~15.5x will tend to its long-term average of ~17x, the stock should be worth $340.68 by the end of fiscal 2024 (in less than 12 months actually).
This makes CACI stock about 9.8% undervalued relative to its last closing price.
The Bottom Line
As last time, I have to conclude today that CACI is undervalued, but not strongly enough to be rated a Buy. Yes, the backdrop for growth looks clear, with a possible expansion of the defense budget in the United States and an already large backlog that should be monetized in the near future. In addition, we must not forget what management's priorities are: Shareholder returns are not their last priority, so I expect strong FCF to support further share repurchases in FY2024, which will support CACI and its valuation multiples for some time. However, I would like to buy the stock 15-20% lower - this is when CACI will become a truly undervalued small-cap gem in my view.
Thanks for reading!
For further details see:
CACI International: Good Business, But With Limited Upside Potential