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Strategies & Market Trends : Value Investing

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To: Paul Lee who wrote (43151)	7/2/2011 11:06:13 AM
From: E_K_S	1 Recommendation of 78698

Hi Paul Lee - Re: VSE Corp. (VSEC) This is a tricky value play and IMO all hinges on if the company can stop the free fall in their Government business as the DOD continues to downsize their operations. The stock has fallen over 37% from its highs anticipating the drop off in future business but analysts still are looking for single digit growth (4.3%) in 2012 which I believe is still too optimistic. 2009 to 2010 revenues were off 15% to $866M and from 2010 to 2011 were off 31%. Analysts are looking for their revenues to stabilize at $609M in 2012. SG&A remains high and has not dropped off in line with future revenues. Although not as critical in cost-plus-fixed-fee contracts, it will still impact their future profitability. The company has made a significant move by buying Wheeler Bros. Inc, a supply chain management company for $185M (all cash paid over 5 years - investors.vsecorp.com ). This allowed them to secure a U.S. Postal Service Repower Contract that should help stabilize the company's future revenues. VSE Corporation and Wheeler Bros., Inc. Win US Postal Service Repower Contract my.insideview.com The acquisition came at a high price increasing their debt obligations by 5.4X's from around $34M to just over $219M. It appears they got a pretty good deal paying between 5-7 PE based on future earnings incentives. ------------------------------------------------------------------------------------------------------------------------------ Is this a Value Buy? The company sells at a 5 PE which is definitely in value territory. The future PE is unknown but the analysts consensus is $4.00/share or around a 6 PE. Even with their new accumulated debt obligations from the Wheeler Bros. acquisition, LT Debt/ Net Annual Revenues s/b less than 5. If the company can stabilize their annual revenues at $600M and an industry PE of 7 is used for valuation, the high end valuation IMO is $28/share ($4.00/share x 7) or about 16% higher from current levels. I would be more interested in a risk/reward profile of between 30%-50% which would translates to a stock price of $14/share - $19/share. The company operates many divisions that can help both the government and private sector operate more efficiently. They need to broaden their base out of the DOD and into other areas of the government and even the private sector. In this fiscal environment, I think there are better areas to invest in. VSE Corp might be a good candidate if they can stabilize their revenues and broaden their service offerings to include other Non DOD departments (maybe State & Local municipalities as an out source service supplier) and/or even provide selected out source services to the private sector. It's possible they could even be considered a possible acquisition candidate to the very large government contractors (ie. LK NOC GD finance.yahoo.com ) as these companies need to bring more efficiencies to their operations which VSE Corp can provide. EKS

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