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Tickers in this Article: CACI, CSC, SAI, IBM, LMT, RTN, LLL, CSCO, NTAP
Weak federal government spending has been a problem for a lot of companies recently, including Cisco (Nasdaq:CSCO) and NetApp (Nasdaq:NTAP). With major worries about the unsustainability of recent budget deficits and political pressure to cut spending, it wouldn't seem like a good time to invest in companies that largely rely on federal business for their revenue. Still, with IT products and services that help government agencies modernize and cut costs, CACI International (NYSE:CACI) may be able to capture a bigger piece of smaller budgets. (To help further identify company success, read 3 Secrets Of Successful Companies.)

TUTORIAL: Stock Basics

A Stronger Fourth Quarter Than Expected
CACI managed to log better than 13% growth in the fiscal fourth quarter, slightly beating the average analyst guess. Organic growth was strong as well, at better than 11%. As usual, business from the Department of Defense was the driver this quarter - up more than 17% and making up 81% of sales. Revenue from federal civilian agencies, the company's second largest category, was down more than 2%.

CACI did even better below the top line. Operating income rose 45% on a reported basis and more than 25% pro forma, while pro forma EBITDA rose 22%. While a fairly large chunk of CACI's outperformance came from earnout adjustments, higher margins still made a significant difference.

Trouble on the Orders
The picture was not as encouraging when it came to orders. CACI won awards worth $550 million during the quarter, more than 60% of the company's recognized revenue in the quarter. Similarly, funding orders were up just 5% (0.9 times sales), and the company's funded backlog fell about $100 million from last year. Exiting the quarter, the company's funded backlog would cover about two quarters of similar revenue.

Orders were strong in the first quarter of this past fiscal year, but they trailed off significantly in the following three quarters - leading to a book-to-bill ratio of around 0.80. Compared to the trailing five-year average at about 1.00, that is a meaningful drop. Still, compared to what other government IT providers are seeing, this could have been a lot worse, and CACI did recently win a prime contract from the Department of Veteran Affairs that could be worth as much as $12 billion over five years.

A Long Dry Spell?
Unfortunately, there is no reason to think this situation will get better fast. The Department of Defense budget is often a popular target for budget cuts (at least among half of the political spectrum), and while CACI has done well in the post-9/11 upgrade cycle, that may be closer to an end. What's more, rivals like Computer Sciences (NYSE:CSC) and SAIC (NYSE:SAI) will compete fiercely for the money that's available.

CACI can credibly sell the idea that its services actually lower costs for the federal government, but IBM (NYSE:IBM), Lockheed (NYSE:LMT), Raytheon (NYSE:RTN) and L-3 (NYSE:LLL) will all push similar claims. What it may come down to, then, is what particular programs the government decides to continue (or expand) and which get cut back. SAIC, for instance, gets business from the Department of Energy and from various healthcare information service projects, and those could be more resilient than defense programs.

The Bottom Line
The good news for CACI is that it is the incumbent provider for a lot of high-value contracts, and the government does not generally switch providers just to save a small amount of money. So CACI should have some stickiness unless its rivals get very aggressive on bidding. Likewise, the company's high percentage of workers with security clearances makes it harder for just any would-be rival to unseat it.

The outlook for CACI's stock is not so clear. This company has had a great run of growth over the past 10 years - a run that will almost certainly be impossible to match in the coming years. Still, even if the company can only grow at low single-digit rates (on average) over the next decade, the shares are too cheap. The trouble is the optics and the news flow - CACI will get batted around as politicians argue about budgets, and shareholders fear the worst. This will not be an easy buy and hold, then, but the value is there for investors who can invest on the basis of multi-year outlooks and ignore the quarter-to-quarter turbulence. (For more on earnings, read Earnings Power Drives Stocks.)

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