Investors cheered year-end results from ManTech International (NASDAQ:MANT), sending shares of the government services firm up nearly 10% on Feb. 22 after ot beat fourth-quarter estimates and forecast a better-than-expected 2018. The company was a highflier in the late 2000s, when demand for its foreign deployment services was at a high, but ManTech has spent the better part of this decade revamping itself to grow its domestic work.
Company officials used the earnings call to make the case that even with shares up 57% in the past year and 128% over the past five years, the best is still to come. Here are four points investors should consider when deciding whether ManTech is a buy.
In Q4, we received $1.1 billion in contract awards and for the year, contract awards totaled $4.2 billion, representing a book-to-bill of 2.4 times in both periods. This marks our strongest bookings year and the highest annual book-to-bill ratio in the company's history. New business comprised approximately 50% of awards in the year. The mix of business we won during 2017 continues the way toward cyber, IT solutions, intelligence, and systems engineering support.
-- Kevin M. Phillips, CEO
ManTech's grittier businesses -- handling military logistics and managing facilities in the Middle East, for example -- were big winners in the 2000s, but as that work began to dry up, the company in recent years has been focused on growing its IT and technology business. That transformation seems to have taken root, with Phillips saying the company expects to get about 45% of revenue in 2018 from the intelligence community.
The IT business should be higher margin and less cyclical than logistics, but there is substantial competition for those contracts, so investors should watch to see if the recent strong bookings are sustainable. ManTech exited 2017 with a total backlog of $7.1 billion, up 14% from the end of the third quarter and up 45% from last year.
The company is expecting about 7% organic growth in 2018, with CFO Judy Bjornaas telling investors that over time she believes there could be upside to that figure.
Phillips said the company expects to submit proposals worth between $10 billion and $12 billion in 2018, up from about $7 billion of proposals submitted in 2017.
"We believe that across our customers, there will be an increased demand for our technologies and solutions, particularly for full-spectrum cyber, IT modernization, and emerging technologies with cloud, digital, mobile, and data analytics," the CEO said.
Given that our strong balance sheet can accommodate future acquisitions and other investments coupled with the incremental cash flow from tax reform, the board has authorized us to increase our current dividend level from $0.21 per share to $0.25 per share to be paid in March. This equates to an annualized dividend of $1 resulting in an industry-leading dividend yield.
-- CFO Judy Bjornaas
With business booming, ManTech has excess cash. The company's 1.75% forward yield ranks in the top tier among defense firms. And with very little debt on the balance sheet -- just $31 million as of the most recent quarter -- the company retains plenty of flexibility and should be able to sustain its payout even if opportunities arise.
In fact, if ManTech is able to win a substantial portion of that new business it's going for, free cash flow would come in ahead of estimates and the dividend boost might look conservative. Loop Capital analyst Joseph Vafi in a note said the company has a "bright" outlook for 2018 and added that if all goes to plan, 2019 could end up coming in considerably better than estimates.
I would say that given the upturn or the view of the budget movement over the next two years, there is more discussion about opportunities. I don't know if they happen the first half or second half of this year or into early 2019, but there seems to be more discussion about potential M&A opportunities or candidates coming out over the course of the next 12 months.
ManTech has been a serial acquirer, using M&A to broaden its capabilities and increase its exposure to IT. But the company did just one deal in 2017, buying cloud solutions vendor InfoZen for $180 million.
With Congress finally reaching a deal on a two-year budget agreement, expect more activity in the near future. Government IT work tends to take a back seat when agencies are dealing with short-term continuing resolutions, which focus mostly on essential ongoing projects and meeting payroll.
The newfound ability to project what agencies have to spend over the coming years should make it easier to assign valuations to sellers and could motivate buyers to strike quick to add the capacity needed to take on additional work.
... but not a blockbuster
ManTech's objectives haven't changed. We think that the tuck-in acquisition strategy is very good and our market positioning is strong. I think, our contract awards last year, our pipeline, our win rates, all support that we are of a reasonable size and if you think about the contract awards, our size hasn't precluded us from winning two $800 million contracts. It hasn't precluded us from winning $4 billion of bookings. -- Phillips
A wave of consolidation has altered the government IT landscape, creating titans including Leidos Holdings and a soon-to-be bulked up General Dynamics IT division. Given the importance of scale in this business, those larger companies could create headaches for mid-sized players like ManTech. But Phillips believes there is enough work to go around, noting the success they have had in recent years winning new business.
Phillips said ManTech's shopping list is going to be "broad," explaining on the call that targets will probably be valued at less than $500 million. It appears he doesn't feel any urgency to quickly expand or do a merger of equals with a similar-sized company to keep up with Leidos or the remade IT business of General Dynamics.