CACI International (NYSE:CACI) has been one of the most aggressive players in the rapidly consolidating government services sector. The company last year fell short in its audacious bid to steal CSRA from the arms of defense titan General Dynamics, but in the quarters since, it has found intriguing ways to deploy its financial firepower.

CACI on Jan. 30 said it would acquire two privately held companies, LGS Innovations and Mastodon Design, for a combined $975 million, continuing its push toward higher-value specialized products and away from vanilla consulting and IT management contracts. The deals, coupled with encouraging fiscal second-quarter results, are evidence that the company's ongoing shift in focus is beginning to gain traction. Growth-focused investors would be wise to take notice.

The details

The companies CACI is buying both specialize in electronic warfare and signal intelligence. LGS, which got its start as the government R&D unit inside the famed Bell Laboratories and was later spun off as part of Lucent Technologies, is a provider of spectrum management, cyber and intelligence products, and command and control products for the Pentagon and intelligence agencies. Mastodon Design, meanwhile, specializes in rugged and lightweight modules used for signal intelligence and electronic warfare.

Military helicopters in flight over the ocean

Government contractor CACI International is going on the offensive. Image source: Getty Images.

CACI earlier in the decade established its electronic warfare credentials with a $820 million deal for Six3 Systems. CEO Ken Asbury, speaking on a call with analysts following the earnings release, said the soon-to-be-acquired businesses will complement CACI's existing offerings, fill in some product gaps, and create a one-stop shop for a range of products.

Current CACI products and solutions will utilize the technologies and manufacturing capabilities of both LGS and Mastodon. Likewise, LGS and Mastodon can integrate CACI's set of capabilities into their product and solutions while greatly expanding their access to the CACI customer base. Combined, we will be able to provide truly differentiated offerings in real-time spectrum management, signals analysis and exploitation, again, EW, photonics and cyber.

CACI said it expects the purchases to add about $480 million in revenue and $82 million in EBITDA over the next 12 months, significant amounts for a company that reported $4.64 billion in total sales and EBITDA of $456.86 million in the last 12 months.

On the earnings front, CACI's EPS of $2.71 easily beat analysts' consensus expectation of $2.25, as stronger-than-expected results from operations offset a higher tax rate. The company's 8.7% EBIT margin was up slightly from a year prior, though free cash flow was dampened by the cost of opening a new facility, as well as shutdown-related closures of some government payment offices late in the quarter.

Management also raised its full-year EPS guidance range to $9.96 to $10.35, up from $9.77 to $10.16, to reflect the contribution of the acquired businesses and "improved performance in the core CACI."

Check out the latest earnings call transcripts for companies we cover.    

CACI Chart

CACI data by YCharts

What it means

CACI has been working for years to shift away from its traditional role of providing IT services and other consulting and toward higher-value technologies. That has become more urgent due to a wave of consolidation in the government IT sector, which has created a handful of large players who are better able to compete on price.

Since the beginning of 2016, Leidos Holdings (NYSE:LDOS) acquired the IT business of Lockheed Martin for $4.6 billion, General Dynamics paid $9.7 billion for CSRA, and more recently, Science Applications International Corporation acquired Engility Holdings.

CACI tried to match that scale with its attempt to buy CSRA, but this specialization route could be a better option. The businesses the company is acquiring have higher margins and less recompete risk than traditional IT work because government customers are willing to pay up for effective, specialized equipment. Through these deals, CACI is establishing itself as a priority vendor for the intelligence community, and the U.S. Army in particular.

There are risks to deal-making. CACI is paying a rich 11.9 times forward EBITDA projections for the properties, although that figure will be reduced somewhat by the estimated $140 million in transaction-related tax benefits that are expected. CACI is also levering up to fund the transactions and expects to have net debt of 3.5 times its EBITDA when they close. But it's an experienced acquirer and has worked with these businesses in the past, so management should have a clear integration road map in place. Nonetheless, it will have to tread carefully to make sure the purchases turn out as planned.

The company ended the quarter with a backlog of $13 billion, up 16% from a year prior, and it has nearly $10 billion in submitted bids awaiting award. About 80% of those submissions are for new work, rather than defending existing contracts from competitors. CACI said it expects to submit another $14.3 billion worth of bids before the end of June, 70% of which will be attempts at new business. The company isn't likely to win all that work, but even some modest success there would help boost growth heading into 2020.

Time to buy shares of CACI?

The truth is, CACI is being aggressive because it has to be, and for most investors, I'd recommend buying shares in its more-established rivals including Leidos and Booz Allen Hamilton (NYSE:BAH), which aren't under as much pressure to act. But I believe CACI's strategy is on target, and management so far is doing a good job of executing on that strategy.

CACI, trading at 16.25 times trailing earnings, is also cheaper than Booz Allen (21.48) or Leidos (18.05). For those with a tolerance for some risk, CACI is a stock worth taking a look at.