Industry and investors sat up and took notice of CGI Group Inc.'s proposed purchase of American Management Systems Inc. and the sale of AMS' defense and intelligence group to CACI International Inc.
After commercial IT spending began slowing in 2000 and the economy weakened, federal IT services stocks began outperforming commercial IT service stocks and the broader market indexes.
Strong trends among the federal IT service companies, more signs of a turnaround in the commercial sector and net inflows of money from investors have resulted in good stock performance for both groups.
With the second-quarter earnings season over, investors seem more confident that commercial information technology spending has bottomed out and is improving. Several Wall Street firms have upgraded technology companies in recent weeks, which helped shares, including commercial IT service firms, hit new 52-week stock price highs.
As the reporting season for second quarter earnings comes to an end, it looks like it's been another good one for the publicly traded federal IT service companies.
Wall Street is again focused on earnings season, which will be underway when this column appears. Last quarter, results from federal information technology firms generally beat investor expectations.
The consolidation trend is alive and well in the federal information technology industry. General Dynamics Corp.'s agreement to acquire Veridian Corp. for $35 per share in cash, or $1.5 billion including debt, certainly got the attention of industry, as well as investors.
Overall first quarter results were strong for most publicly traded federal IT companies, as they met or beat investor expectations and maintained or raised their earnings guidance.
As we enter first-quarter earnings announcement season, it appears to be another difficult quarter for commercial information technology service firms, yet a good quarter for federal IT service firms.
<FONT SIZE=2>Federal IT stocks have been weak over the past couple months for a number of reasons, including uncertainty from civilian budget delays and potential reallocation of funds because of the possible conflict with Iraq. Some investors are also saying that growth may have gotten "as good as it could get." As an example, they point out that defense spending growth in fiscal 2004 is currently proposed at about 4 percent, compared to double-digit increases the two previous years. </FONT>
<FONT SIZE=2>It has been a wild ride for the </FONT><FONT SIZE=2>publicly traded federal information technology services companies. In one day alone, following lowered expectations by PEC Solutions Inc., the federal IT companies were down 10 percent as a group. </FONT>
<FONT SIZE=2>Many investors will be asking two key questions as they review fourth quarter 2002 earnings reports and management earnings guidance for 2003: Is there any sign of a rebound in commercial information technology spending, and will federal continue to show good growth?</FONT>
<FONT SIZE=2>In a bit of a switch, commercial information technology stocks have outperformed federal IT stocks over the past couple months. Is this the rotation out of federal stocks and into commercial that many federal IT investors have been fearing as commercial business picks up? </FONT>
Investors in the federal and<FONT SIZE=2> commercial information technology space have watched Electronic Data Systems Corp. go from high flying to struggling. One issue EDS is tackling is the eight-year, $6.9 billion Navy-Marine Corps Intranet contract awarded in October 2000. </FONT>
As we near the end of the third<font SIZE="2"> quarter, it appears there will be moregood news from federal information technology services firms and not-so-good news fromcommercial IT service firms. </font>
The fundamentals of the federal information technology industry remain intact, despite the volatility of stocks over the past couple of months. Investors are attracted to the industry because of its long-term contracts, earnings growth and strong cash flow, particularly in the current market.
While the federal information technology service firms continue to do well, both in business and share price, the commercial companies are struggling to recover.
