IT Services Deep Dive_ Who's Most Likely to DOdGE A Slowdown_

Summary of Key Points from the Conference Call Industry Overview - Industry: Aerospace & Defense Electronics - Date: November 19, 2024 - Focus: IT Services and Federal Civil Exposure Core Insights and Arguments 1. Impact of DOGE on IT Services: IT services stocks have declined by 21% since the introduction of the Department of Government Efficiency (DOGE), reflecting uncertainty regarding efficiency measures and their implementation [2][2][2] 2. Valuation Metrics: The average IT services stock is trading at a premium of 8% on P/E and 3% on EV/EBITDA compared to the 3-year average, indicating that despite the selloff, stocks are not particularly cheap [2][2][2] 3. Federal Civil Exposure: The average civil exposure for companies in the sector is 30%, with a potential risk to revenue growth and margins due to DOGE initiatives [2][2][2] 4. EPS Sensitivity: A 1 percentage point change in Federal Civil revenue growth impacts EPS by approximately 0.4%, while a 50 basis point drop in margins affects EPS by 1.4% [2][2][2] 5. Company-Specific Insights: - BAH: Generates approximately $4 billion from Federal Civil, with a 34% sales contribution. The civil segment has shown a 14% organic CAGR over the past five years [11][11][11] - CACI: Federal Civil sales account for 21% of total sales, down from 26%. The company is focusing on higher-margin DoD contracts, which have grown to 74% of total sales [39][39][39] - LDOS: Similar sensitivity to civil pressures, with a notable impact on EPS from changes in civil revenue and margins [2][2][2] Additional Important Content 1. Contract Obligations: FY2023 contract obligations totaled $759 billion, with $456 billion for the DoD and $303 billion for civilian agencies, indicating a significant market size [2][2][2] 2. Market Sentiment: Negative sentiment could lead to an average 6% impact on shares if the group faces a 5-point discount to the S&P 500 [5][5][5] 3. Long-Term Contracts: The average contract duration for civil work is five years, which may provide some stability despite current uncertainties [2][2][2] 4. Future Growth Projections: Federal Civil revenue is expected to decelerate to 6% growth from a previous 14% CAGR, indicating a potential slowdown in this segment [15][15][15] 5. Valuation Comparisons: BAH is currently trading at a 21.4X FY2 P/E, which is in line with the market multiple of 21.5X, while CACI trades at a 17.5X FY2 P/E, reflecting a 19% discount to the market [44][44][44] This summary encapsulates the critical insights and data points from the conference call, providing a comprehensive overview of the current state and outlook of the Aerospace & Defense Electronics industry, particularly in relation to IT services and federal civil exposure.