Summary
- CACI stock posted its Q2 FY23 results. Its revenue increased, but profit margins saw a decline.
- CACI International was awarded contracts worth $3.5 billion in Q2 FY23.
- When compared to its peers, it is currently overvalued.
- I assign a hold rating on CACI.
CACI International ( CACI ) offers enterprise and mission customers expertise to support government transformation in the intelligence, military, and federal civilian sectors. They operate in two segments domestic and international operations. In the domestic operations segment, they provide information solutions and services like engineering services, digital solutions, enterprise IT, and C4ISR to U.S. federal government agencies and commercial enterprises. In the international operation segment, they offer a range of IT services and software products to government and commercial customers globally. They also provide full-spectrum cyber, counter unmanned aircraft system solutions, system engineering, and logistic engineering. CACI was founded in 1962. They recently posted its Q2 FY23 results . This report will discuss the company's valuation and analyze its financial performance. I don't see any reason to purchase CACI at the moment because I think they might be unable to give their stockholders a return. I, therefore, rate CACI as a hold.
Financial Analysis
CACI recently announced its Q2 FY23 results. They exceeded market revenue expectations by 3%, but they fell short of market EPS expectations by 1.3%. The revenue for Q2 FY23 was $1.65 billion, a rise of 11% compared to Q2 FY22. I believe the main reason behind the increase was acquisitions completed by the management and the increase in organic revenue, which grew by 6%; the other reasons behind the revenue increase were revenues from the department of defense, federal civilian departments, and commercial customers increased by 11.9%, 7.5%, and 16.5%, respectively, in Q2 FY23 compared to Q2 FY22. Their revenues from technology and expertise also grew by 6.2% and 12.1%, respectively, in Q2 FY23 compared to Q2 FY22. The net income for Q2 FY23 was $87 million, a decline of 3.5% compared to Q2 FY22. I think the primary reason behind this decline was higher tax rates and higher interest expenses. The diluted EPS for Q2 FY23 was $3.68, a decline of 3.9% compared to Q2 FY22. Contracted net profit margin is a topic of concern despite revenue growth. The net profit margin was 5.28% in Q2 FY23 compared to 6% in Q2 FY22, and I predict that because of the economy's high inflation, it will continue to decline in future quarters.
Technical Analysis
CACI is trading at the level of $302. Since 2020, the stock has been steadily increasing, and it is presently close to its all-time high. The stock has created a double top pattern on the weekly time frame, which is regarded as a bearish pattern. The stock is also close to a $310 resistance line. I think it would be best to avoid this company for the time being because it has a bearish outlook and could even drop as low as $245.
Should One Invest In CACI?
The revenue estimate for FY23 is $6.6 billion, which is 6.8% higher than the FY22 revenue. The company's revenue development has been steady over the past five fiscal years, demonstrating how reliable and promising the business is. Regarding Q2 FY23, they were awarded contracts worth $3.5 billion, which I believe will boost its revenue in the coming quarters. However, I am concerned because a significant portion of its sales come from the federal government and because its net profit margins are also shrinking. I anticipate that this trend will continue in the upcoming quarters due to strong inflationary pressure. These are the reasons I suggest one should stay away from the company for now.
Talking about the valuation part. They have a PEG ((FWD)) ratio of 2.4x compared to the sector ratio of 1.65x, which shows they are overvalued. Another valuation metric is the EV / EBITDA ratio. They have an EV / EBITDA ratio ((FWD)) of 12.22x compared to the sector ratio of 11.13x. I think CACI is overvalued based on these two ratios, which are reliable tools for assessing a company's valuation.
The shareholding pattern of CACI looks perfect. Institutions own 90.7% of the shares in the company, which is a positive sign for investors. We observe less volatility in share price fluctuations when institutions own most of a business. The company is also increasing its shareholding. They have accelerated their $750 million share repurchase program by entering into an agreement to buy back $250 million worth of shares.
Risk
The majority of their revenues come from the federal government. The contracts create the bulk of its revenues that the federal government awards 94.8% of its total revenue in FY22, and 95.5% of its total revenue in FY21 came from contracts given to them by the government. They expect government contracts will continue to be their major source of income, and this high dependency can be a matter of concern. Their revenues and income may be impacted, which will harm their balance sheet if their relationship or image with the federal government is compromised or if the government awards contracts to their rivals.
Bottom Line
They are currently overpriced in comparison to industry norms, in my view. Additionally, the stock appears to be technically unsound, and in my view, a 15% decline is possible. Therefore, there is currently no buying opportunity in CACI. I rate CACI as a hold after examining all the factors.
For further details see:
CACI International: Overvalued With Declining Profit Margins