Public federal IT service companies in general reported third quarter 2005 results in line with their guidance ranges, but fourth quarter 2005 revenue guidance for most of those companies was lighter than most investors expected.
Most public federal IT service companies have reported third quarter earnings, and results have been better-than-expected earnings per share with mixed performance on revenue.
Federal IT service stocks trailed off in the past month, following concerns that emergency funding for hurricanes Katrina and Rita would pressure federal IT budgets. Supreme Court hearings, Katrina investigations and other issues also have delayed fiscal 2006 spending bills.
The federal IT services industry has seen a lot of merger and acquisition activity, and I expect it will continue. Several factors are driving this activity: the industry's size, its high degree of fragmentation with no truly dominant players, relatively low total-market growth, good access to capital and strong free cash flow.
After investors sold them off in the beginning of the year over concerns about lower defense spending, federal IT service stocks have roared back, with many reaching all-time highs in recent weeks.
With the first quarter earnings season complete, most federal IT service companies reported at or above expectations and gave solid outlooks for the year, although a couple were cautious on the second quarter.
Despite investors' concerns over slower defense and IT spending, President Bush's fiscal 2006 IT budget request to Congress asks for a 7 percent increase, better than the 0.9 percent request in 2005 ? subsequently revised to 3.9 percent by the Office of Management and Budget ? and better than the increase I was expecting.
Despite positive earnings reports from federal IT services providers throughout 2004, the group's stock performance was mired for most of the year by the uncertainty of political elections and potential budget slowdowns.
After being outperformed by commercial IT services companies and the S&P 500 in the first half of the year, federal IT services companies outperformed both in the third quarter and continued their momentum into the fourth quarter.
Despite no change in strong business trends among the federal IT service companies over the past few quarters, investors have been driving stocks higher in the past couple of months.
Investors often ask me whether bigger is better in the federal information technology industry. What size do companies have to become to be competitive?
After three consecutive quarters of improvement in business performance, commercial IT spending dropped in June. Dozens of commercial software and hardware companies preannounced weak second-quarter results, blaming customer purchase delays and a lack of large sales.
First quarter results in the federal IT industry were generally good, but the industry kept investors on their toes the past couple of months: A big positive earnings surprise by ManTech International Corp. was followed about a month later by a big negative earnings surprise from ManTech.
Investor nervousness over higher interest rates, record oil prices and global unrest have pushed down most stock indexes and have pressured the shares of the federal IT firms.
So far this year, federal IT stocks have underperformed in the overall stock market amid concerns of growing budget deficits, slow government spending and election jitters. Added to the improving prospects for commercial IT spending, this has caused some investors to reduce their exposure to the sector.
