ManTech Offers Opportunity For Defense Industry Growth

By Ryan C. Fuhrmann | March 05, 2012 AAA

ManTech (Nasdaq:MANT) bills itself as a leading technology and solutions provider for the nation's major national defense programs. Its focus on mission-critical activities and those that help detect and deter terrorism have resulted in solid growth in recent years. Unfortunately, trends are emerging that ManTech is starting to succumb to budget cuts in the industry, but it still represents a way for investors to squeeze some growth potential out of the space.

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Full Year Recap
Sales advanced 10.2% to $2.9 billion. Management cited strength in "certain mobile communications and cyber security programs," but did experience positive growth in "most" of its core businesses. During the fourth quarter it highlighted new contracts that illustrate its main operating activities. It was awarded contracts to help maintain and update systems used to monitor the Army's Mine Resistant Ambush Protected vehicles, technologies that allow war fighters to use their weapon systems, and systems that detect nuclear devices that may be imported or transported and "intended for illicit use in the U.S." It considers many of its activities to be mission-critical, and rightly so given the overview of new contract activity. Backlog ended the year at $4.7 billion.

Operating income increased 5.7% to $227.4 million to lag the sales growth. The lag was due primarily to an 11.1% rise in its cost of services. Operating general and administrative expenses, such as corporate overhead, did grow more slowly than the top line. Net income advanced at a similar rate, growing 6.6% to $133.3 million. Slightly higher shares outstanding resulted in earnings per diluted share growth of 5.5% and earnings of $3.64. To know more about income statements, read Understanding The Income Statement.

For the coming year, management currently anticipates sales of $3.2 billion, net income of $131 million and earnings per diluted share of $3.56. In other words, it expects a 10.3% top line growth but a slight fall in profitability.

The Bottom Line
Based off the current guidance, 2012 looks to be an off year for ManTech. Sales and earnings are up nearly 20% annually over the past decade, which management has been able to also maintain over the past five years, on average. The three-year track record is also impressive, with sales up more than 15% annually and earnings up a very respectable 12.5% over this same period.

By the looks of it, ManTech is starting to succumb to budgetary pressures in the U.S. national defense business. After the end of the fourth quarter, it announced the acquisition of a firm that provides healthcare systems integration services for the federal government. This could indicate future struggles in growing its core business going forward.

The forward P/E of 9.5 already reflects stagnant industry trends and therefore leaves upside should ManTech return to outgrowing key rivals. Larger defense firms including Lockheed Martin (NYSE:LMT), Raytheon (NYSE:RTN) and Northrop Grumman (NYSE:NOC) trade at similarly reasonable earnings valuations. Investors likely also appreciate their above-average dividend yields, but the smaller operators including ManTech and Esterline Technologies (NYSE:ESL), which provides aerospace and defense, should have a better ability to grow in the fact of challenging industry conditions. They could also get taken out by the bigger players, potentially at a substantial premium to the existing share prices. For additional reading, check out 5 Must-Have Metrics For Value Investors.

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At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.

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