ICF International (ICFI) Chairman and CEO Sudhakar Keshavan presented Wednesday morning at the Cowen & Co. 35th Annual Aerospace/Defense & Transportation Conference at the InterContinental New York Barclay in New York City.
Kesavan began with a prepared statement explaining the activities of ICF International. He emphasized that the company is a leading provider of advisory and program management services.
The company is involved in three major sectors. The health, social programs and consumer/financial sector accounts for approximately 48% of the business. The other two areas are energy, environment and infrastructure, and public safety and defense. The portfolio is highly diversified, with no single contract accounting for more than just under 4% of total revenue.
For growth strategy, the company is focused on leveraging advisory work into full lifecycle solutions. It is also looking to expand the commercial business, replicate the business in wider geographies and pursue strategic acquisitions. Areas where ICF believes it can expand its commercial business include energy efficiency programs, aviation, energy infrastructure, digital interactive and commercial health care.
The company has experienced steady growth over the last several years. It had 8% CAGR in revenue over the last three years and 13% CAGR in EPS.
According to 2013 guidance, ICF had $65 million in operating cash flow, $95.5 million in working capital and long term debt of $64.1 million. It expects full year revenue of $945 million to $960 million and diluted earnings per share of between $1.95 and $2.00.
Kesavan noted that the company has a diverse portfolio compared to competitors, with little reliance on a single industry, customer or project.
According to Kesavan, ICF is currently getting $1 of advice for $3 to $3 of implementation. He believes they can raise that to $1 advice for $10 of implementation.
ICF plans to continue to deploy capital to buy back stock. Kesavan said the company is not looking at changing that philosophy.
The company is happy with the verticals it is currently operating, and is not looking for new verticals. It is looking at expanding those verticals geographically, but not looking to get into new areas.
The win rate for ICF, according to Kesavan, is about 90%.
To hear a replay of the presentation, click here.
David M. Drillock, Vice President and Chief Financial Officer of Cytec Industries, presented at Wednesday morning at the Cowen & Co. 35th Annual Aerospace/Defense & Transportation Conference at the InterContinental New York Barclay in New York City.
In prepared remarks, Drillock explained that Cytec Industries is newly transformed. He said aerospace materials now account for 50% of the business, with 75% of that coming from civil aircraft. The bulk of company operations are in North America.
Cytec expects modest growth for 2014, accelerating as new programs start to take affect. The focus for 2014 includes margin improvement, productivity and volume increases.
The company sees long-term opportunity for carbon composites. The drivers here include a desire for lower vehicle weight, better fuel efficiency and tighter EU regulations.
In terms of specialty chemicals, growth drivers include new mines, geographic expansion and adjacent/nonmining markets. Cytec leads the market with next-generation technologies to separate minerals. Drillock said there are a large number of opportunities in this space, and Cytec is well-positioned to capture growth.
The capital-allocation strategy for the company is to continue to support organic growth. Cytec, says Drillock, has a strong balance sheet and strong free cash flow. It expects to generate $1 billion in free cash flow between 2014 and 2018, and expects sales for 2014 to be between $1,975 million and $2,050 million.
Drillock said he is retiring for personal reasons, and he expects a new CFO in four to seven months.
The industrial segment has been lagging, but it is starting to see some strength. Cytec had a tooling order for a large aerospace platform which should translate to strength for the first two quarters of the year. That order will translate to approximately $10 million over a two year period.
Cytec has focused on increasing productivity in the aerospace area, which should bring higher margins. The company is applying expertise to existing assets that previously were constrained and making equipment more efficient. Additionally, the company is insourcing more actions because increased productivity provides that opportunity.
Overall, Drillock says the portfolio is less volatile than it previously was. In aerospace, there are some concerns about the possibilities of program delays, but most programs appear on track. This risk is manageable because Cytec is involved in numerous different programs. Mining could run into difficulties if developing markets stop investing for long periods of time, but that is not likely.
To hear the webcast on the corporate web site, visit http://phx.corporate-ir.net/phoenix.zhtml?c=110732&p=irol-EventDetails&EventId=5091088
Anthony J. Moraco, CEO of SAIC (SAIC), and CFO John R. Hartley presented on Wednesday at the Cowen & Co. 35th Annual Aerospace/Defense & Transportation Conference at the InterContinental New York Barclay, New York City.
Moraco began the presentation by explaining that SAIC separated into an independent company on September 27, 2013. He said that SAIC is now one of the largest pure play technical services providers to the U.S. government and that the company currently has approximately $4 billion in annual revenue with 90% prime contracts.
Moraco said that the spinoff allows them to protect their base and expand into customers they already know but who they have under served in the past. The spinoff, according to Moraco, creates new access points unencumbered by conflict of interest.
Hartley then explained that company revenue is between $3.85 billion and $4.10 billion with diluted earnings per share of $2.13 to $2.33. Operating cash flow is equal to or greater than $125 million. As of January 31, 2014, SAIC has repurchased 362,723 shares of stock to create shareholder value.
During a question-and-answer period, Moraco said SAIC recovered relatively easily from the government shutdown late last year. SAIC sees the budget deal as essentially neutral, but positive in that it should allow awards to restart. Moraco expects some lift in calendar quarter one and two.
Moraco said he expects numbers to trend up in FY 15. He noted, however, that the first quarter of FY 15 should have a double-digit decrease. This, he said, will be the fourth consecutive quarter of negative double digit numbers. The numbers should then flatten and the company is expecting organic growth in the second half of the year.
Overall, Moraco said SAIC is very pleased with the status of the company post-spin off. The upside for FY 15 will be triggered by award activity, according to Moraco, and he believes SAIC can outperform the market as a whole. The downside would be any surprises from the spin off. However, Moraco believes the downside is offset by the upside.
To view the presentation on the company web site, click here.
Amin J. Khoury, CEO of B/E Aerospace (BEAV), spoke Wednesday morning at the Cowen & Co. 35th Annual Aerospace/Defense & Transportation Conference at the InterContinental New York Barclay in New York City. CFO Thomas P. McCaffrey joined Khoury for the presentation.
Khoury noted that the aftermarket sales for B/E Aerospace recouped over the last three quarters, after six quarters of tepid growth. Khoury expects that aftermarket growth for the next three to five years will track revenue passenger mile growth, supplemented by new products and services.
According to Khoury, B/E Aerospace’s inventory, breadth, depth, and IT assets provide it with a strong competitive advantage in the aftermarket space. In terms of the retro-fit market, he described it as providing solid performance in the last quarter of last year. He stated that robust delivery rates of wide body aircraft is likely to translate into high growth rates in the retro-fit market for B/E as airlines move to incorporate new equipment from those wide body aircraft into their exiting fleet.
Additionally, Khoury highlighted the competitive advantage of B/E Aerospace in providing same-day delivery of orders. In response to a question on why B/E Aerospace is increasing investments in the oilfield rental area, Khoury noted that the oilfield rental business is an excellent opportunity to accelerate growth rates of the CMS business which leverages several of the strengths of B/E Aerospace. He stated that the market is attractive because of strong secular growth, manageable competition and growth rates faster than the aerospace business at comparable margins.
Khoury estimated that the company will grow that business to approximately 10%, up from 5%, over the next several years. The appointment of Werner Lieberherr to Co-CEO, according to Khoury, does not indicate any changes in the management of the company.
Overall, Khoury stated B/E Aerospace expects quarterly earnings to progress over the first half of this year and to accelerate in the second half of the year due to the supplier furnished equipment and CMS business. He noted that the company is very well positioned, with an $8.8 billion backlog, and that it should be able to grow faster than the aerospace business generally due to its leverage to the wide body market, SFE programs and its large share of the first class business.
To view the full presentation on the company website, click here.
Sterne Agee & Leach Analyst Brett D. Rabatin likes the growth prospects and profitability of underfollowed stock Hilltop Holdings Inc (HTH), as the company has become the fifth-largest bank in the Texas market in deposits and is a story that is likely to evolve.
“Another name I still really like…since we initiated on it this year, is actually Hilltop Holdings. Only a couple sellside analysts follow the stock. Ticker is HTH. It’s underfollowed, and I don’t think people, a lot of folks even realize it’s actually a bank,” Rabatin said.
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HTH used to be a mortgage REIT, Rabatin says, but since has wound that business down. Additionally, it has been misunderstood as an insurance company due to two insurance acquisitions, yet HTH has actually become one of the largest banks in the Texas market in deposits, and is likely to grow over the next three to five years.
“People have been worried about the mortgage contribution, but that’s really declined, and it’s a really profitable franchise. I like the growth prospects and profitability and how they are going to grow over the next three to five years. And then we are talking about a Gerry Ford vehicle, so at some point you could possibly expect a monetization of their investment. It’s also a name that still has some capital to deploy and it’s just — I think the story there will continue to evolve and consensus seems light to me this and next year,” Rabatin said.
Umpqua Holdings Corp’s (UMPQ) acquisition of Sterling Financial Corporation (STSA) may turn out to be a better deal than originally expected once investors realize the expense savings opportunities the agreement will bring, says Brett D. Rabatin, Senior Research Analyst at Sterne Agee & Leach, Inc..
“One of my favorite names is Umpqua; they are in a large basically quasi-MOE with Sterling Financial, and I think the estimates are going to move up as a couple of things happen,” Rabatin said. “Overall the deal could be a little better than expected.”
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Mr. Rabatin also points to an acquisition UMPQ did earlier in the summer, which he expects will continue to better margins. Additionally, with the mortgage banking income for both UMPQ and STSA and pro forma declines over upcoming quarters, Mr. Rabatin believes investors will become more satisfied with expectations for 2015.
“Both Umpqua and Sterling do have mortage banking operations, and I think one of the things people have been fearful of for good reasons the past six months have been banks that do have exposure to mortgage banking and those earnings contributions and what that impact will have on EPS,” Rabatin said. “But I think as the mortgage banking income for both these companies and then pro forma declines over the next few quarters, I think people will be more comfortable with a more peer-like valuation on 2015 expectations.”
BB&T Corporation (BBT) has demonstrated an interest and degree of competence in making acquisitions in addition to having premium price to book value, says Miller Tabak + Co., LLC’s Senior Analyst Thomas S. Mitchell, making it a part of the regional banking core acquirer base.
“If we look at somebody like BBT that has a nice — has a premium price to book value, has been in the business of making acquisitions serially for decades. And it certainly has the management that’s capable of recognizing what will fit in for them, where they can take advantage and enhance their earning power,” Mitchell said.
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Mitchell says BB&T has a bevy of additional acquisition opportunities just in their own market. This coupled with the company’s success and astuteness in making acquisitions make the stock one of Mitchell’s top picks.
“There definitely will be plenty of opportunities just in their own market area, just in Virginia and the Carolinas. You don’t even have to go much further than that, although you can. There will be literally dozens of banks that are probably reasonable targets for them,” Mitchell said.
William Blair & Company LLC Analyst Rahul Bhangare says WNS Holdings Limited (WNS) is poised to deliver 12% to 14% growth in 2014. He says at that level it could be the fastest growing company in the business process outsourcing sector.
“It’s more of a turnaround story, actually. If you look back a few years ago, their revenues were contracting because of some client-specific issues and some mismanagement,” Bhangare says. “At that point, the management team was replaced, and the company sourced its new CEO from an IT services vendor named Syntel. They have done a very nice job of cutting the fat.”
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Bhangare says one of the key changes WNS made was to restructure its sales organization. Instead of selling by horizontals like finance and accounting services or procurement services, WNS now sells industry-specific solutions.
“For example, they’ll sell an entire claims management solution that includes finance and accounting, contact center, etc., and they sell those services on a transactional basis,” Bhangare says. “They will charge $1 per claim, for example, instead of charging by a full-time equivalent.”
After implementing that new strategy over the last two to three years, Bhangare says WNS has successfully accelerated growth. He says the company will close 2013 at 9% growth, and he believes WNS is positioned to continue on that upward trajectory in 2014.
Resources Connection, Inc. (RECN) CEO Kate Duchene says her company has historically grown primarily through organic growth. But, the time could be right for the California-based provider of finance and accounting consulting services to consider an acquisition in the forensic and corporate investigations arena.
“We are always looking at acquisition opportunities and where we might find practices, either geographically or from a discipline perspective that we could add to our core business in a synergistic way,” Duchene says. “One of the areas we are interested in is forensic and corporate investigations. We think there is opportunity in that arena as the world is driven by more and more regulation and compliance initiatives, and corporate investigations are on the rise broadly.”
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Duchene adds that her team is also keeping an eye on other segments as potential targets for acquisition.
“There’s a lot of interesting work going on in data analytics. I think that’s an area where our IM practice leader is spending time looking,” she says. “Digital security is an area of interest and certainly seems to be on top executives’ minds every day, as we’ve all read about the Target scandal through the holidays.”
William Blair & Company LLC Analyst Timothy McHugh says On Assignment, Inc. (ASGN) should grow faster than competitors in 2014, largely on the strength of its IT staffing business.
“As it relates to On Assignment, they’ve seen some choppiness in some large projects related to health care IT in their Oxford division lately,” McHugh says. “But generally speaking, as I said, IT staffing remains the strongest area in the staffing world. That accounts for more than 80% of On Assignment’s revenue, and I think in particular they are gaining share within even that IT staffing space.”
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Additionally, McHugh says there is some discrepancy among investors as to how to look at On Assignment’s valuation.
“There’s certainly their GAAP results, but on top of that they provide an adjusted EPS or a cash EPS that adjusts out for intangible amortization, some deferred tax shields, as well as adds back some other items just to be conservative,” he says. “I think that cash EPS presentation is fair, I think it’s reflective of cash flow, and so that’s the number I use. I think it’s also fairly comparable to the cash-flow metrics from the rest of the peer group.”
Based on that metric, McHugh says On Assignment traded at around 16 times 2014 earnings, which he says is a discount to its peer group. That, combined with faster growth, makes On Assignment one of McHugh’s top picks in the staffing & outsourcing services sector for 2014.
