Beating Buffett

VSE Corporation was established in 1959 with a mission to provide engineering and technical support services to reduce the cost and improve the reliability of Department of Defense systems and equipment.

Today, VSE is a broadly diversified company focused on creating, sustaining, and improving the systems, equipment, and processes of government through core competencies in legacy systems sustainment, obsolescence management, prototyping, reverse engineering, technology insertion, supply chain management, foreign military sales, management consulting, and process improvement. Their expanded mission now includes providing innovative services and technologies to help customers succeed in the engineering, energy, environment, information technology, and defense services markets.

VSE Corp. [NASDAQ: VSEC- $35.35] has been ranked among the top 100 defense contractors, top 10 foreign military sales contractors, and top 50 Navy contractors in the nation.

VSEC has experienced tremendous growth over the past decade. EPS surged from a split-adjusted $0.15 in 2002 to peak at $4.67 in 2009. Their shares reflected that progress moving from $2.51 in 2002 to a 2007 high of $63.

Here are the per share numbers as reported by Value Line:

The dividend was just raised 20% again going from $0.05 to $0.06 quarterly. There is plenty of room for future increases as the payout ratio is under 6% of projected 2010 earnings.

At this morning’s quote of $35.35 VSEC trades at just 8.4x estimated earnings for this year. That’s well below the 11.25x average multiple from 2003 through 2009. That average was brought down substantially by the extremely depressed levels from 2008 - 2009 when the market was in the toilet. A rebound to even 11x this year’s $4.23 consensus view would bring these shares back up to $46.53 or up 31% by year-end.

Is that a reasonable target price? VSEC touched a January high of $54 this year and peaked at $63.00, $49.69 and $49.00 in 2007-2008-2009 respectively. If anything, my goal price is probably too conservative.

VSEC has no debt – short or long term and held over $2.2 million in cash as of March 31, 2010. There is no defined benefit pension plan. With only a little over 5 million shares outstanding it shouldn’t take too much buying interest to move these shares up rapidly.

Dr. Paul Price

June 9, 2010

Disclosure:  Author is long VSEC shares.

VSE Corporation (NDAQ:VSEC - $42.53) serves as a centralized management and consolidating entity for business operations that consist of diversified program management, logistics, engineering, information technology (IT), Construction program and consulting services performed on a contract basis. VSE’s contracts are with agencies of the United States Government and other government prime contractors, non-government organizations and commercial entities. They conduct operations under four principal segments: Federal, International, IT, Energy and Management Consulting and the Infrastructure.

VSE Corp has been a sensational long-term grower and its shares have reflected its fundamentals. VSEC shares grew from a (split-adjusted) 2001 low of $2.66 to a 2007 peak price as EPS surged from $0.20 to $2.82 over that six-year period. Since then earnings have continued to grow with fully diluted EPS of $3.74 in 2008 and $4.67 in the period concluded on December 31, 2009.

Despite these stellar results VSEC closed on Feb. 26^th at $42.53 /share or just 9.1x trailing earnings. The shares had hit $54 as recently as January 21, 2010. Why did they sell off by about 17% last Friday? Q4 earnings came in at $1.01 versus $1.05 last year and management indicated that contract delays would hurt first half revenues and earnings.

Here are the VSEC’s per share numbers as reported by Value Line:

The company is debt-free, pays a 0.47% current yield (at just a 4.3% payout ratio) and now trades at near the lowest P/Es of the past decade.

A rebound to a still-below-normal multiple of 12.5x last year’s earnings would lead to a target share price of $59.50 or about 40% above last Friday’s closing quote. Is that reasonable? As noted earlier VSEC touched $63 in 2007 on EPS of just $2.82 and they hit $54 just six weeks ago before the record 2009 earnings of $4.76 /share were formally announced. 

I originally wrote this one up on September 2, 2009 at $33.30/share. I used last week’s drop to add to my position. Where else can you find growth like this at a single digit multiple?

Disclosure:  Author is long VSEC shares.

Read more…