2023-10-04 21:11:44 ET
Summary
- CACI International Inc. has showcased strong growth in recent results, driven by a rise in backlogs and contracts with key government agencies.
- The company is strategically shifting from its traditional expertise business to a more profitable technology business, aiming to enhance its market position and profitability.
- CACI's management has projected revenues of $7-7.2 billion for fiscal year 2024, indicating confidence in the company's future outlook.
Summary
CACI International Inc ( CACI ) is an information solutions and services provider in the information technology sector. The company primarily serves the U.S. government, focusing on defense, intelligence, and federal civilian customers. CACI offers an array of solutions designed to modernize, enhance, and integrate advanced IT solutions, helping its clients to meet complex and ever-evolving challenges.
This post is to provide an update on my thoughts on the business and stock. CACI has showcased strong growth in its recent results, backed by a strong growth in backlogs and contracts, primarily driven by key government agencies. The company is strategically pivoting from its traditional expertise business to the more profitable technology business, aiming to further enhance its market position, profitability, and value proposition. My conservative analysis projects significant upside potential for CACI in the double-digit range. Given the promising outlook and potential for outperformance driven by management’s strategic initiatives, I recommend a buy rating for the company.
Investment thesis
In the fourth quarter, CACI secured contracts worth $2.3 billion, marking a 51% rise from the previous year. A significant 70% of these contracts represented new business for the company. Their total backlog has increased by 11% since the last fiscal year, reaching $25.8 billion, and this overall growth in backlog was driven by major contract wins. They currently have bids worth $11 billion awaiting decisions, with plans to submit another $9 billion soon. Significant contracts for the quarter include a 7-year, $1.2 billion deal with the U.S. Navy’s NAVWAR, of which $600 million was recognized in the fourth quarter of 2023. They also secured a 5-year, $209 million contract with the U.S. Fleet Forces Command and a 5-year, $125 million deal related to C5ISR systems. Looking ahead, given CACI's track record and current momentum, it's anticipated that the company will continue to harness new opportunities and maintain its robust growth trajectory in the coming years.
Moving to its operational strategy, CACI is actively enhancing its profit margins, which are showing positive momentum. CACI has strategically increased its profit margins by transitioning from its traditional "Expertise" business to a more profitable software-centric “Technology” business. In expertise, CACI's strengths lie in its customer relations, team quality, and previous project experience, but these factors create a low barrier of entry for competitors. In the last five years, technology's share in CACI's business has risen from 20% to 54% by fiscal year 2022. In fiscal year 2023, both sectors grew 8%, with technology accounting for 54% of sales and expertise at 46%. CACI's long-term goal is a 70-30 split favoring technology, leveraging their expertise business to drive sales in the technology business which has better margins. They view expertise business as more generic and a commodity, whereas their technology business allows them to differentiate themselves. One example of such a shift is the BEAGLE contract. It's evident that this initiative is a flagship example of delivering superior value to clients. The incorporation of Agilent's scalability has significantly optimized efficiency, allowing for more to be achieved with less manpower. This operational efficiency not only provides cost savings for the client but also seems to incentivize them to assign additional tasks, even shifting projects from other contracts. Given CACI's strategic direction, it is anticipated that the company will further increase its focus on technology and continue to enhance profitability in the coming years.
Given the strategic shift and strong financial performance achievements of CACI, it becomes evident that the company's promising outlook is the driving force behind the strong management guidance for fiscal year 2024. For the next fiscal year, the management has projected revenues in the range of $7–7.2 billion. This forecast indicates year-over-year growth of 7%, closely mirroring the growth rate of 2023. This projected rate also aligns with its historical average of approximately 7%. Given the robust revenue growth reported in fiscal year 2023, the consistent guidance for the subsequent year underscores management's confidence in the company's future outlook.
Valuation
I believe the fair value for CACI based on my DCF model is $396.54. My model assumptions are based on CACI's strong fourth quarter results, which showcased significant growth in contracts. This uptick was primarily driven by major contract wins with US government agencies. Additionally, there's strong growth in the company's backlog. Given these achievements, I project 7% growth for the fiscal year 2024, aligning with the management’s guidance for the fiscal year 2023.
Furthermore, the company is strategically bolstering its profit margins by shifting its balance between expertise and technology business, putting a heavier weight on the latter. This emphasis on the technology business stems from its inherent competitive edge and unique value propositions that differentiate the company from its competitors. It's noteworthy that the technology business also provides better profit margins. With these considerations, my model anticipates an expansion in margins to 13%.
Peers include Booz Allen Hamilton Holding ( BAH ) and CDW Corporation ( CDW ). The median forward EV/EBITDA multiple for these peers is 14.78x, their median expected Next Twelve Months [NTM] revenue growth rate is 8%, and the median gross margin stands at 37%. In comparison, CACI has a forward EV/EBITDA multiple of 11.06x, an NTM expected revenue growth rate of 7% and a gross margin of 34.31%. Its lower forward multiple is justifiable given its comparatively lower growth rate and margins relative to its peers.
Using CACI’s current multiple, the target price is projected to be $396.54, indicating a potential upside of 28%. Moreover, if CACI surpasses market expectations or provides growth guidance that exceeds expectations in the forthcoming quarters, its valuation could inch closer to the peer median of 14.78x. At a multiple of 12x, there's a potential upside of 41% from the current share price. Considering the aforementioned factors, I recommend a buy rating for the stock.
Risk
While CACI's valuation indicates strong upside potential, there are risks to it. Should CACI fail to sustain or improve its revenue growth or fail to meet market expectations, it would lead to a lower multiple and a subsequent drop in its share price. This risk is heightened in scenarios where the broader industry or economy faces challenges, as firms with less robust fundamentals (CACI’s metrics are lower than peers’) could see a sharper drop in stock price. Moreover, if CACI's shift towards the technology business doesn't materialize as swiftly as anticipated or fails to deliver the expected results, the company might face a valuation adjustment and a drop in share price.
Conclusion
In conclusion, CACI displayed impressive growth in its contract awards, complemented by a notable increase in backlogs. This momentum was primarily propelled by securing contracts with prominent government agencies. Given CACI's past performance and its ongoing trajectory, it's projected that the firm will consistently tap into fresh opportunities, ensuring sustained growth in the forthcoming years. This is further supported by management’s fiscal year 24 guidance.
Turning to its strategic direction, CACI's efforts to bolster its profit margins are bearing fruit. The company is actively transitioning from its traditional expertise business to the more lucrative software-driven technology business. In the long run, CACI aims to place a greater emphasis on the technology business. This shift not only gives them a distinct edge in the market but also better margins.
Given these considerations, my model indicates substantial upside potential, with growth projected in double digits. Should future results surpass expectations, the potential for gains could be even greater. Therefore, I recommend a buy rating.
For further details see:
CACI International: Pivoting To Technology-Driven Growth With Attractive Upside