The stocks of federal information technology and professionalservices companies are performing in line withthe S&P 500 this year. Both are down about 6 percent,while aerospace and defense companies' stocks are havinganother solid year and are up 7 percent.
One comment I often hear lately about the financialmarkets is that their volatility has increased. Theincreased volatility is an indicator of uncertainty, causinginvestors to react quickly to each piece of financial,economic or political news.
With the public federal IT services firms having reported results for the quarterended Dec. 31, there have been some noteworthy trends. Contract awards have generally been lighter than last quarter. However, I anticipate better contract award activity in the next few quarters.
Areas such as health care, energy, environment and education will probably see new government initiatives that require new IT and service programs to support them.
Public companies that provide federal IT services have continued to see their stock prices rise since mid-August, when most of the companies reported second-quarter results and issued outlooks that excited investors.
Despite the difficult business environment for many federal IT and professional services companies - largely unaffected by the issues facing the broader stock market and economy - stocks of publicly traded companies have fared well so far this year.
The public federal IT and professional services firms will soon report second-quarter 2007 results. I generally expect them to report results in line with projections but to be cautiously optimistic of future results.
The growth rates of the federal IT budget and growth among the publicly traded federal IT services firms have been slowing on average since the Iraq war began because funds allocated to the war have not fully covered the costs and usually have been delayed.
The business environment for federal IT services companies continues to be challenging, with the companies largely reporting lackluster fourth-quarter results and outlook for 2007, with a couple of exceptions.
Investors' trepidation about slowing IT budget growth has prompted a drop in stocks of publicly traded federal IT companies. And it's no help that there is weakness in the overall stock market over concerns of rising interest rates and oil prices hurting global economic growth.
Results in the federal IT industry have been dampened by the late passage of the fiscal 2006 defense bill, and more recently have taken a hit from the delay in the defense supplemental spending bill.
Over the past year, federal IT service stocks are up by 18 percent, above the 9 percent from the S&P 500 and the 17 percent from commercial IT service companies. Looking to the future, as contract activity improves through the year, and mergers and acquisitions inevitably are announced, federal IT stocks may trade higher.
Federal IT services stocks have been up following the past month's fourth quarter earnings reports. Quarterly results and the near-term outlook were not exciting for investors, but contract awards seem to be picking up. Most of the public federal IT service companies are expecting accelerated growth in revenue and earnings per share.
After reviewing the fiscal 2007 budget request, as well as fiscal 2006 enacted budgets, and the strong pace of defense spending, the outlook for federal IT services firms is favorable.
The budget delay and moderating growth rates of federal IT services companies contributed to the failure of their stocks to keep pace with their earnings growth last year.
