Three quarters of earning’s beats and solid revenue growth are pushing this consulting stock higher.
ICFI International, Inc. (ICFI)
From Canaccord Genuity Research
Monday night, ICFI International, Inc. (ICFI) disclosed two noteworthy events: a material acquisition that bolsters its position in the large and fast growing TAM in federal IT services, and the potential of insourcing on some of its disaster relief work in Puerto Rico. Net net, we think the top line outlook for 2020 is higher than our previous estimates, but potentially more tilted toward inorganic growth.
We see the two events being somewhat EBITDA neutral, but a higher tax rate injects some headwind to adjusted EPS. We think some upside to our new estimates is quite possible given our projections reflect mostly business in hand today; and our view that in-sourcing in Puerto Rico may be less than we have modeled.
We remain convinced that the ICFI investment case overall is better now than it has been in several years.
ICF’s services portfolio is very broad but has always lacked critical mass in some markets for federal IT services. We think the ITG acquisition fills much of this white space, providing full lifecycle, cloud-based IT solutions, while leveraging strong partnerships with players such as ServiceNow and Appian. Agile development is also resonating with ITG customers, which we believe can be leveraged across the broader ICF portfolio.
ITG’s recent growth has been impressive at ~15%, outpacing the market. From here we believe cross selling helps as well, leveraging core ICF subject matter expertise into IT opportunities. ITG’s mid-teens EBITDA margin should also be accretive to the consolidated margin. Net net, we think the acquisition makes quite a bit of sense from a strategic perspective. Financially at a mid-teens EBITDA valuation, we don’t see this deal as cheap, but we also believe there is more strategic value in ITG for ICF than for much larger IT-focused federal services players.
In addition to inorganic growth, ITG will help the core ICF bid pipeline as well. While ICF has been growing its IT qualifications organically, we believe ITG significantly boosts this trajectory. Management noted that approximately 10% of core ICF’s bids outstanding would benefit from the addition of ITG qualifications into the bids.
Offsetting some of this good news, ICF also noted that it is lowering its revenue outlook from the FEMA-related disaster recovery work it is doing in Puerto Rico. Following recent elections there, the new governor is trying to increase the local government’s role in public infrastructure. While the eventual outcome here remains unclear, we have conservatively gone ahead and removed several points of revenue for this event for 2020. In our view, we believe that the high standards demanded by work for FEMA will eventually accrue to ICF even against a new local political backdrop in Puerto Rico. While this is a fluid situation and could change, this is a negative development from both a revenue and margin perspective. So far there is no impact on HUD-related ICF is working on in the Commonwealth.
With most all of ICF’s businesses doing better than they have in several years, we are encouraged by the outlook here and fine-tuning up our revenue estimates.
Joseph Vafi and Pallav Saini, Canaccord Genuity Research, www.canaccordgenuity.com, January 14, 2020