Research Articles

CACI - Growth at a Ridiculously Low Price

FAST Graphs - Wednesday, April 04, 2012

For 50 years CACI International Inc (CACI) has been serving America by providing in-demand services and solutions for our most vital missions for defense, intelligence, homeland security, and IT government modernization.  Moreover, the company has consistently outgrown the government’s defense budget because of its emphasis on higher growth areas of government services needed to defend our country.  Also, because of the sensitive nature of the services that are provided through contracts ranging from 3 to 5 years, we believe the company possesses a very strong moat.  The majority of CACI’s employees hold high-security clearances that provide natural barriers to entry against outsiders attempting to impinge on their turf.

CACI has a long history of growing earnings in excess of 18% per annum and produces prodigious amounts of free cash flow.  Nevertheless, it appears that fears of a shrinking defense budget have driven their shares to valuations that are unprecedentedly low historically.  Consequently, we believe this high-quality defense company with a niche, offers a good opportunity for investors seeking high-growth at a reasonably low level of risk. We believe the company is well-positioned to continue to grow future earnings at an above-average rate. Consequently, we see several opportunities for profit.  Organic growth should continue at a mid-teens compounded annual rate, the company’s ample cash flows position it for strategic acquisitions and a price earnings ratio expansion from its current PE of 11 to a more normal PE of 18 to 20 is reasonable to expect as investors’ anxiety over defense cuts diminish.

Growth Stocks Defined

Growth stocks are defined as companies with high rates of change of earnings growth of 15% to 20% or better.  Growth stocks offer the potential for share prices to rise in lockstep with their profit growth in the long run.  Therefore, the PEG ratio formula (price equals growth rate) tends to be the most appropriate formula used to value growth stocks. However, due to the exponential nature of compounding large numbers, PEG ratio forecasts are capped at 40%.

Because of the higher valuation typically awarded to fast growth, growth stocks offer the potential for greater capital appreciation.  On the other hand, they also offer higher risk.  First of all, they tend to command much higher than average PE ratios, and second, achieving very high levels of growth is very difficult to sustain. Consequently, forecasting future earnings growth is more important with high growth stocks than any other class of stock. Also, the average growth stock typically ploughs all of its profits back into the company to fund its future growth, instead of paying dividends.

CACI International Inc (CACI):  Large-cap Growth at an Attractive Price

About CACI International Inc:  Directly from their website

“Celebrating our 50th year in business, CACI sustains an exceptional record of success by providing professional services and IT solutions needed to prevail in the areas of defense, intelligence, homeland security, and IT modernization and government transformation. We deliver enterprise IT and network services; data, information, and knowledge management services; business system solutions; logistics and material readiness; C4ISR solutions; cyber solutions; integrated security and intelligence solutions; and program management and SETA support services. CACI solutions help federal clients provide for national security, improve communications and collaboration, secure information systems and networks, enhance data collection and analysis, and increase efficiency and mission effectiveness. A member of the Fortune 1000 Largest Companies and the Russell 2000 index, CACI provides dynamic careers for approximately 14,400 employees working in over 120 offices in the U.S. and Europe.”

Earnings Determine Market Price:  The following earnings and price correlated F.A.S.T. Graphs™ clearly illustrates the importance of earnings. The Earnings Growth Rate Line or True Worth™ Line (orange line with white triangles) is correlated with the historical stock price line. On graph after graph the lines will move in tandem. If the stock price strays away from the earnings line (over or under), inevitably it will come back to earnings.

Click on this link to a LIVE and fully functioning graph on CACI International. We suggest running graphs over numerous time frames as part of a more comprehensive fundamental analysis.

CACI International Inc:  Historical Earnings, Price, Dividends and Normal PE Since 1998.

 

Performance Table CACI International Inc

The Two Keys to Long-Term Performance

Years of research and experience have taught us that there are two critically important keys to achieving above-average, long-term shareholder returns at reasonably controlled levels of risk. The first key is earnings growth, or what we like to call the rate of change of earnings growth. The faster a company can grow its business (i.e. earnings), the larger the income stream it can produce with which to reward shareholders. This is because of the power of compounding, which Albert Einstein was alleged to have called "the most powerful force on earth." Ultimately, both capital appreciation and dividend income will be a function of a company's ability to grow its profits.

The second key is valuation. When a company can be purchased at its intrinsic value based on earnings and cash flow generation, the shareholders' rate of return or long-term capital appreciation will inevitably correlate to and/or equal its earnings growth rate. Overvaluation will lower that rate of return and conversely, undervaluation will increase it. Consequently, paying strict attention to the valuation you pay to buy a stock is a critical component of both greater return and taking lower risk to achieve it. Because, ironically, when you overpay for even the best business, you simultaneously lower your return potential while increasing your risk of achieving the lower return.

The associated performance results with the earnings and price correlated graph, validates the above discussion regarding the two keys to long-term performance.  Notice the impact that valuation (black line above or below orange earnings justified valuation line) had on the following performance results. 

 

The following graph plots the historically normal PE ratio (the dark blue line) correlated with 10-year Treasury note interest.  Notice that the current price earnings ratio on this quality company is as low as it has been since 1998.

 

A further indication of valuation can be seen by examining a company’s current price to sales ratio relative to its historical price to sales ratio.  The current price to sales ratio for CACI International Inc is .44 which is historically low.

 

Looking to the Future

Extensive research has provided a preponderance of conclusive evidence that future long-term returns are a function of two critical determinants:

1.    The rate of change (growth rate) of the company’s earnings

2.    The price or valuation you pay to buy those earnings

Forecasting future earnings growth, bought at sound valuations, is the key to safe, sound, and profitable performance.

Therefore, it logically follows that measuring performance without simultaneously measuring valuation is a job half done. CACI International Inc is clearly an industry leading superior business, which based on the consensus estimates from leading analysts, appears to be capable of growing earnings at an above-average rate for the foreseeable future.  At its current price, which is attractively aligned with its True Worth™ valuation, CACI International Inc represents an opportunity for growth at a reasonable price. The important factor is that CACI International Inc, with its strong balance sheet and potential for future earnings growth, has real assets and cash flow underpinning its stock price. This solid economic foundation offers shareholders the potential for both a strong margin of safety and an opportunity for outsized future returns.

The Estimated Earnings and Return Calculator Tool is a simple yet powerful resource that empowers the user to calculate and run various investing scenarios that generate precise rate of return potentialities. Thinking the investment through to its logical conclusion is an important component towards making sound and prudent commonsense investing decisions.

The Estimated Earnings and Return Calculator on CACI is based on its five-year average historical earnings growth rate of 18.1%.  CACI International Inc has low long-term debt at 24% of capital. CACI International Inc is currently trading at a P/E of 11.1, which is below the value corridor (defined by the five orange lines) of a maximum P/E of 21.7. If the earnings materialize as forecast, CACI International Inc’s True Worth™ valuation would be $218.31 at the end of 2017, which would be a 27% annual rate of return from the current price.

 

Earnings Yield Estimates

Discounted Future Cash Flows:  All companies derive their value from the future cash flows (earnings) they are capable of generating for their stake holders over time. Therefore, because Earnings Determine Market Price in the long run, we expect the future earnings of a company to justify the price we pay.

Since all investments potentially compete with all other investments, it is useful to compare investing in any perspective company to that of a comparable investment in low risk Treasury bonds. Comparing an investment in CACI International Inc to an equal investment in 10 year Treasury bonds, illustrates that CACI International Inc’s expected earnings would be 8.8 times that of the 10 Year T-Bond Interest. (See EYE chart below). This is the essence of the importance of proper valuation as a critical investing component.

 

Summary & Conclusions

This report presented essential “fundamentals at a glance” illustrating the past and present valuation based on earnings achievements as reported.  Future forecasts for earnings growth are based on the consensus of leading analysts.  Although, with just a quick glance you can know a lot about the company, it’s imperative that the reader conducts their own due diligence in order to validate whether the consensus estimates seem reasonable or not.

We believe that CACI it is extremely high-quality Defense Company with a niche that is currently being unfairly discounted by “Mr. Market.” The company possesses a predictable and consistent opportunity for continued double-digit earnings growth that is significantly in excess of the average company.  Nevertheless, it can currently be purchased at a significant discount to the average company.  This company pays no dividends; it is purely an opportunity for growth that can currently be purchased at a significant discount to its True Worth™. Therefore, we suggest that investors seeking high-growth at a reasonable level of risk should dig deeper into this high-quality growth opportunity currently on sale.

Disclosure:  Long CACI at the time of writing.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.

 


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Testimonials


“I appreciate your work, Chuck. As a subscriber to FAST Graphs™, I use the tool to decide on whether to purchase additional shares of what I currently hold or to add a new holding. Your articles help me make full use of the tool and give other readers valuable information, if they take the time to learn. One of the biggest enhancements that I use is the FFO data added for MLPs and REITs.”


“When FAST Graphs™ were unavailable because of Hurricane Sandy, I realized how much I need them in order to make investment decisions.

(Wish I could be) Long FAST Graphs!!!”


“One more vote for the value of FAST Graphs™; just started a subscription to Chuck's great service (premium), and am having a ball analyzing so many stocks quickly.”


“I feel very ill-equipped to make investment decisions without Fast Graphs. :-)”


“Yesterday, I signed up for your F.A.S.T. Graphs™. It's a really amazing, valuable tool for checking over/undervaluation of stocks. Wish I had it years and years ago!!”


“Love the F.A.S.T. Graphs™: One glance and you know a whole lot.”


“About Chuck's F.A.S.T. Graphs™: They are invaluable to me in making decisions about the stocks I own (in addition to what you are saying about doing other research) and the ones I hope to own in the future.”


"Chuck -- Your proprietary F.A.S.T. Graphs™ are a VERY impressive tool!"


“If there were an Investor Hall of Fame for people who have helped others with their investing, and sharing valuable information, you and your F.A.S.T. Graphs™ would get one of my selections.”


“I love Chuck's F.A.S.T. Graphs™! Well worth the price of admission for what he gives you.”


"Chuck - Thank you for your well thought out articles. I tend to be a visual type of person so I really appreciate the F.A.S.T. Graphs™ approach."


"Great article, as always! I always look forward to your articles, and am especially eagerly awaiting your next in this series. I find the F.A.S.T. Graphs™ extremely helpful."


“Your F.A.S.T. Graphs™ put all of this in a single artful picture and the accompanying spreadsheets hammer home the point.”


“I use the F.A.S.T. Graphs™ method to evaluate all of my ideas. I recommend it for individual investors, since it helps them focus on data and get past the many emotional arguments.”


“I recently subscribed to the F.A.S.T. Graphs™, and these articles are helping me learn how to better use them. They really do give you a good quick look at the valuations picture. A much needed tool!”


“I also always appreciate the clear-cut information provided through your F.A.S.T. Graphs™ and articles.”


“Thanks, Chuck, for your F.A.S.T. Graphs™. Each of these graphs is worth 1,000 words in describing a company's growth, consistency and valuation. Thanks for sharing your graphs.”


“Thanks, Chuck. Love the F.A.S.T. Graphs™! It makes investing so much more clear.”


“Chuck's F.A.S.T. Graphs™: They are invaluable to me in making decisions about the stocks I own (in addition to what you are saying about doing other research) and the ones I hope to own in the future.”


”I am amazed at the usefulness of your F.A.S.T. Graphs™ and I plan on using them for a long time to come.”


“Chuck's F.A.S.T. Graphs™ will give you a tool to find those well chosen stocks...”


“Thanks for the F.A.S.T. Graphs™, Chuck. They are the best tool I've used.”