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Generals gathered in their masses
Just like witches at black masses
Evil minds that plot destruction
Sorcerers of deaths construction
In the fields the bodies burning
As the war machine keeps turning
Death and hatred to mankind
Poisoning their brainwashed minds, oh lord yeah!
Politicians hide themselves away
They only started the war
Why should they go out to fight?
They leave that role to the poor
Time will tell on their power minds
Making war just for fun
Treating people just like pawns in chess
Wait till their judgement day comes, yeah!
This song was written over 30 years ago. Yet today it seems so eerily prophetic. Now Ole Ozzy was probably on some serious chemicals when he penned “War Pigs” but gee, it really makes you think.
Now if Dick Cheney can get 2 drunk driving tickets in the same year and still grow up to be smart enough to start a war in Iraq and make his buddies all wealthy, I think its only fair that $$$MR. MARKET$$$ somehow is able to capitalize on Mr. Cheney’s infinite wisdom.
Don’t get me wrong, I love our troops but do not support the war in Iraq. And no, I am not smart enough to come up with a solution to this quagmire. What I am smart enough to know is if I can make a little money off of this war, then maybe I can donate some of my profits to a local charity that supports the families of our military personnel overseas.
Today I bought VSEC, VSE Corporation, at 44.82. I will sell it in 4 to 6 weeks at 51.64. Geez….I should have bought this one last week when it first came out of my computer, but I was busy with baseball, hot dogs, the 4th of July and all that beer that had to be consumed in the hours in between. But I digress…
Here’s why I like VSEC:
VSEC stock is up over 168% over the last 12 months, indicating amazing price growth relative to its modest PE of 24. VSEC has a relative strength of 99. It's been a stellar market performer. Look at this chart:
Since July 2002, the stock is up more than 900% on the out of control defense spending, and there is no reason to believe, unfortunately for taxpayers, that this will subside anytime soon. While the Democrats are certainly putting pressure on the White House to end our involvement in Iraq, withdrawal will not be abrubt and some kind of defense fortification will need to remain. If we withdraw troops, and I hope we do, we’re going to need to spend even more Department of Defense money on assets to take their place. The company provides engineering, testing, and logistics services for the US ARMY and Navy (each account for about 45% of sales) and other government agencies on a contract basis.
VSE Corporation was established in 1959 with a mission to provide engineering and technical support services to reduce the cost and improve the reliability of Department of Defense systems and equipment. Originally incorporated as Value Engineering Company, VSE has evolved along with the government’s and military’s needs. It now creates and improves equipment and systems in several areas of government. Today, VSE is a broadly diversified company focused on creating, sustaining, and improving the systems, equipment, and processes of government through core competencies in legacy systems sustainment, obsolescence management, prototyping, reverse engineering, technology insertion, supply chain management, foreign military sales, management consulting, and process improvement.
And boy oh boy have we ever increased our government’s needs. VSEC has simply gone along for the ride. In the last 3 years, sales have grown 171%, from $134 million to $364 million. VSEC basically bills out their government contracts on a cost plus basis, so as revenues expand, so will earnings without much risk of cost overruns. Look at the string of annual EPS: $0.15, $0.45, $0.75, $1.29 and, most recently, $1.61. That is strong steady and consistent earnings growth. VSEC's revenues and earnings per share are up more than 90.7% and 86.7%, respectively, in the company's most recent published filing.
What example can we give of VSEC’s confidence in their earnings model? This little pipsqueak company pays a dividend, and has done so for over 10 years.
In most Whartonian schools of thought, P/S ratios below 1.5 are acceptable, and VSE, with a P/S ratio of 0.2, really looks like a bargain. The PEG ratio is even more attractive at 0.25. Even if VSEC cannot sustain its existing growth rate, it is still a bargain compared to other investment opportunities. There is lots of room to run. VSE Corporation’s balance sheet is stellar. The company has no Long Term debt.
What is the secret behind the growth? Is it just demographics, or something else? VSE has the ability to team up with other companies for larger contracts. What’s the appeal?
Did you ever go to an Army / Navy football game? Did you ever see how much those retired military officers can pound the booze? Not only can they pound the booze, but they really know how to talk up a storm. Of course they couldn’t outdrink $$$MR. MARKET$$$ and I had the opportunity to recognize the fact that these guys were really tight with one another. It was a hardcore fraternity of guys getting smashed. What does this have to do with VSE? Everything.
Who is the big boss of VSE Corporation? Donald Ervine. Mr. Ervine served a distinguished 27-year career of military service, including 24 years active-duty in the U.S. Navy achieving the rank of Captain. Mr. Ervine holds a bachelor's degree in Business Management from West Virginia Institute of Technology and a master's degree in International Affairs from George Washington University. He is also a graduate of the Naval War College and the Industrial College of the Armed Forces. You think this guy doesn’t have any booze buddies in the high level of military? When the Pentagon wants to award government contracts are they going to give them to some bespectacled geek from Northrop Grumman or are they going to give them to their old drinking buddy Mr. Ervine?
James Knowlton is the other big gun at VSE Corp. Since beginning his VSE career in 1984, Mr. Knowlton has held increasingly responsible positions as Manager, Technical Recruiting; Logistics Support Manager; Assistant Vice President and Group Manager, Engineering Support Group; and Vice President and General Manager, Engineering and Logistics Center before being appointed Executive Vice President in 1997. Prior to his association with VSE Corporation, Mr. Knowlton completed a highly successful 23-year career with the U.S. Navy. Mr. Knowlton is responsible for the operational policy development and oversight, personnel management, cost management and marketing. Mr. Knowlton also monitors sales growth, identifies potential new areas of business, provides innovative bid strategies, and oversees contract execution and performance including quality, schedules, budgets and customer liaison. Customer liaison? I wonder what time the bar at the “O Club” closes?
Finally there is Michael Hamerly. Hamerly joined VSE in 1984 as a Project Manager. From 1984 to 1994 Mr. Hamerly served as Combat Systems Division Manager and Marine Engineering Group Manager. In 1996 Mr. Hamerly was promoted to Vice President, Deputy Manager, Engineering and Logistic Center. From 1999 to present, Mr. Hamerly has served as Manager, Fleet Maintenance Division. In 2006, Mr. Hamerly was promoted to Executive Vice President. and Deputy Director, International Group.
The Fleet Maintenance Division also provides property management, logistics and disposition services to support the seizure and forfeiture program for the U.S. Treasury Executive Office for Asset Forfeiture and other federal agencies.
Before joining VSE Corporation, Mr. Hamerly served more than 20 years active duty in the U. S. Navy and retired as a Chief Petty Officer. Mr. Hamerly holds a bachelor’s degree in Management from Saint Leo University, Tampa, Fla. Anchors away dude.
So VSE is really good at closing the deal with the military mighty. Their nationwide network of local offices provides access to a spectrum of corporate resources and services in diversified engineering, logistics, management, and information technology disciplines. They combine their individual skills, experience, and motivation with corporate resources, technology, teamwork, and the management principles of integrity, honesty, and self-governance to deliver high quality, cost-effective solutions to a global customer base. They win the jobs and get them done. This is the key to building a base of business and growing it and growing it.
VSE has provided more than $2 billion in diversified engineering and technical support services to the U.S. Government. VSE has been ranked among the top 100 defense contractors, top 10 foreign military sales contractors, and top 30 Navy contractors in the nation. VSE and Navy personnel work together worldwide, both ashore and afloat, to maintain fleet readiness. VSE is even more proud of the long-term client relationships they have been able to establish on the basis of their commitment to quality products and services. Remember, this is a little microcap company, muscling in on Raytheon, Grumman and Boeing. VSE’s Federal Group provides engineering, technical, management, integrated logistics support, and information technology services to all U.S. military services and other government agencies. They have a big umbrella for such a small company.
The Army is VSE’s longest standing client. For more than four decades, VSE has been providing the Army with professional services support in value engineering, legacy systems sustainment, obsolescence management, prototyping, reverse engineering, technology insertion, supply chain management, management consulting, and process improvement.
The big news is that VSE Corporation last month took a transformational leap in its business enterprise. Last month they bought Integrated Concepts & Research Corporation (ICRC), a diversified technical and management services company. Both ICRC and VSE have strong track records in serving the Federal government market. ICRC's areas of expertise include information technology, advanced vehicle technology, engineering, materials and components testing, and infrastructure development. The company's current projects include providing enterprise IT services to the U.S. Army Corps of Engineers; managing advanced vehicle research and development projects for the U.S. Army; conducting aerospace testing for NASA; and overseeing the intermodal expansion of the Port of Anchorage. ICRC will benefit greatly from VSE's considerable experience in the Federal marketplace. VSE paid 11.6M in cash for ICRC and may make additional payments up to 5.8M if certain financial targets are met over the next six years. During its most recently concluded fiscal year, ICRC had revenues of 59M and net income of 1.5M. A steal!
What’s all of this worth, in terms of share price. If you just do a straightforward DCF calculation, and assume initial earnings of $9.00 million grow at a rate of 20%, and we discount those future earnings at a rate of 15.00%, we arrive at a net present value for the company's next 10 years of earnings of $113 million. To account for potential earnings beyond the 10th year, we estimate a growth rate of 6.00%, a discount rate of 12.00%, and we arrive at a continuing value of $236 million. To complete the calculation we add these two figures together, subtract the long-term debt for VSEC ($0), and divide by the outstanding shares (4.86 million) to get a per share intrinsic value of $71.71.
And looking forward, where does $$$MR. MARKET$$$ see earnings? Well, the ANAL-ysts haven’t even discovered this stock yet. So I can tell you what I think we’ll see in 2007. In 2007, VSEC will have sales of $505 MM and will earn $2.55/share. At the existing PE of 24, this projects to a stock price of $61.20 per share, which along with its previously calculated intrinsic value of 71.71 places its actual value well ahead of its sell target.
Let’s drag Don Ervine out of the Officers Club and see what he feels:
"During the first quarter of 2007 compared to the same quarter of 2006, VSE revenues increased primarily due to an increase in subcontract revenues under VSE's Rapid Response (R2) contract to provide maintenance and logistics services supporting U.S. Army operations in Iraq and Afghanistan. Bookings for the most recent quarter were strong at about $205 million compared to quarterly revenues of about $121 million, resulting in funded backlog of about $384 million at March 31, 2007. We believe these indicators are positive for our continued growth for the remainder of 2007. We look forward to reporting on our progress as the year proceeds."
It’s a small cap with growing government contracts paying a nice dividend, cash on hand, large gross margins.....what more could you ask for???
I'll tell you what I would ask for...Bring ‘em home.
I am HUGE!!
Bring me your finest meats and cheeses.
$$$MR. MARKET$$$
Let me know what you liked or did not like about this analysis and write up.
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