Summary
- CACI International is truly a sleepy value stock that trades for low double-digit earnings multiples, but has a strong history of steady value creation and free cash flow per share growth.
- CACI has a track record of solid organic growth with limited cyclicality, supplemented with tuck-in acquisitions.
- Valuation on consensus figures today is modest, suggesting limited downside.
The following segment was excerpted from this fund letter .
CACI International ( CACI )
CACI provides specialized technology and consulting services, primarily to U.S. defense and intelligence agencies. The U.S. Army is CACI’s single largest customer. This position replaces BWXT in Upslope’s “defense basket” . CACI’s business is mostly split across Expertise (providing talent to government agencies – e.g., software engineers) and Technology (design and delivery of specific technology-oriented services and products, including for example, battlefield hardware). The company offers its services and products in support of both day-to-day agency operations and specific missions.
At a high-level, CACI reminds me of another Upslope long in an unrelated sector: Silgan Holdings ( SLGN , packaging/dispensing and food can business). Both are truly sleepy value stocks that trade for low double-digit earnings multiples but have a strong history of steady value creation and free cash flow per share growth. Both the stocks and underlying businesses appear very well-positioned for the uncertain macro (or geopolitical, in CACI’s case) environment we’re likely to face in the years ahead. Other notable thesis points for CACI specifically:
- Long-term Geopolitical & Other Tailwinds – Like other components of Upslope’s defense basket, CACI should benefit from an attractive defense spending environment for years to come. CACI should also benefit from IT modernization efforts in U.S. government agencies, as well as its strength in cyber/electronic warfare offerings.
- Strong Management – CACI’s CEO has been in-role since 2019 and previously served in various COO capacities for the company since 2012. His communication is unusually straightforward and clear, and his focus on “free cash flow per share” (despite underwhelming comp incentives) is notable. He is also a significant shareholder, owning $20mm+ of stock (and only one modest sale – in 2020 – during his history at the company).
- Attractive Financial Profile – CACI has a track record of solid organic growth (typically around mid-single-digit %) with limited cyclicality, supplemented with tuck-in acquisitions (for which there continues to be a long runway). ROIC is modest (HSD%) but stable. The balance sheet is nearly under-levered at ~2.5x net – providing flexibility for additional acquisitions or share buybacks.
- Healthy Earnings Backdrop – Given strong geopolitical tailwinds, bipartisan support for defense, and a sizable gap between rising defense budgets and recent outlays (which typically come through on a lag and correlate with revenues for CACI/peers), the earnings outlook for CACI should be solid in the periods ahead. Such a healthy outlook is unusual in the current market/economy.
- Attractive Valuation – Even if estimates do not come up, valuation on consensus figures today is modest, suggesting limited downside: 7%+ FCF yield, 11x EBITDA, 14x EPS. Notably, CACI peer ManTech was recently taken private by Carlyle Group ( CG ) at a premium valuation (5% FCF yield, 16x EBITDA, 26x EPS). The deal was announced in May 2022 and closed in September.
Key risks for CACI shareholders include high portion (~30%) of fixed price contracts (mitigant: solid track record of managing costs and, more importantly, significant diversification by project), lumpy organic growth, labor availability/challenges, M&A execution risk (very acquisitive and larger deals could present heightened risk), and potential government budget headwinds (depending on November elections and potentially driven by elevated inflation/rates longer-term).
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Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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Upslope Capital - CACI International: Our New Long