Department of Defense information technology (IT) partners are poised for improved revenue pick-ups in FY ’18 and FY ’19 due to more flexible budgeting for cyber and cloud projects and a greater embrace of sector consolidation, according to a new report from financial firm Cowen [COWN].
The latest defense industry outlook report from Cowen, released Monday, cites Booz Allen Hamilton [BAH], ManTech [MANT], Leidos [LDOS] and General Dynamics [GD] as their top choices to benefit from increasing DoD demand for IT services.
New reforms in the latest DoD budget, signed by the president in March (Defense Daily, March 23), ease spending restraints that could open opportunities for large IT contractors.
Portions of FY ’18 obligations can now be made into FY ’19, allowing DoD more time to allocate money into new contracts and projects to streamline DoD processes, such as cloud and software as a service efforts, are now being outsourced to the private sector.
Consolidation on these large IT projects may offer scale related savings for DoD, potentially opening up new opportunities for more private sector partners, according to Cowen.
“These factors suggest scale is an advantage in the fragmented defense IT industry,” Cowen officials wrote in their report.
Cowen points to GD’s recent $9.7 billion bid to acquire CSRA as a catalyst for broader defense IT consolidation (Defense Daily, March 28), as DoD looks for partners able to tackle future cloud migration and cyber security overhaul projects.
“Combined with accelerating upturn in sector revenues, strong cash flow conversions, and still modest interest rates, these provide a favorable environment for sector [mergers & acquisitions],” Cowen wrote. “The defense IT sector sets up much like the defense consolidation of the early 1990s with both offensive/defensive M&A motives and fragmented market structure.”
Cowen calls Booz Allen their “#1 defense IT play” for the near-term with an outlook for consistent above-average organizational growth. The report cites seven to eight percent growth in line with big caps.
ManTech’s seven percent organizational growth and rising EBITDA margins, as well as Leidos’ move into DoD electronic health records contracts, position both as key figures for defense IT, according to Cowen.