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Friday, March 1, 2024

SRA International

Good morning! This is a stock trade idea, courtesy of Paul Price, which I’m posting here but soon will be available on the Member’s Forum.- Ilene

 

SRA International – Homeland Security and More – SRX

 

 

 

SRA International [NYSE:SRX] June 8, 2008 price: $23.35

52-week range: $21.10 (March 17, 2008) – $31.88 (October 8, 2007)

 

SRA provides information technology services in the areas of Homeland Security, national defense, civil government and public health. They provide consulting, system design, outsourcing and operations management services. SRA also provides enterprise solutions, disaster recovery, disaster response strategies and environmental strategies.

 

The company came public in 2002 and has shown record sales, cash flow, and earnings per share in each FY since. Fiscal year 2008 ends June 30. Here are the per share numbers* since 2002 [FY 2008 includes estimates for Q4]:

 

FY …… Sales….Cash Flow …EPS …Book Value ..Avg. P/E …ROE…..P/BV

2008 … $25.85 …. $1.70 ……$1.24 .….$12.25 …… 20.1x …..10.5% ….2.1x

2007 … $22.24 …..$1.48 ……$1.09 …. $10.96 …… 24.1x …..10.1% ….2.3x

2006 … $21.11 … .$1.45 ……$1.08 …. $9.55 …….. 30.6x …..11.7% ….4.3x

2005 … $16.31 …. $1.31 ……$1.02 ….  $7.94 ……. 28.0x …. 13.5% ….3.2x

2004 … $11.89 …. $0.96 ……$0.71 ….  $6.55 ……. 27.3x …. 11.5% ….2.8x

2003 … $10.55 …. $0.84 ……$0.56 ….. $6.63 ……. 23.8x ….. 9.4% …..3.5x

 

  • Source: Value Line

 

After a flattish earnings year in FY 2007 things have started accelerating again. Analysts look for $1.24 in the FY just wrapping up and then $1.38 in the year ahead. SRA’s shares thus trade for 18.8 times trailing and just 17 times forward estimates. This is well under their normalized levels of the past six years.

SRA’s balance sheet looks good. As of March 31 they held $136.5 MM in cash versus only $80 MM in total debt. Value Line assigns SRA a financial strength rating of B++.

Officers and directors own about 4.7% of the shares and some well respected value managers own large positions as well. As of March 31, 2008:

Eminence Capital, LLC …………9.2%

FMR [Fidelity Funds] …………..8.0%

Artisan Partners L.P……………..7.3%

Neuberger Berman, LLC ………..5.2%

D.F. Dent & Co. …………………4.9%

Morgan Stanley & Co. …………..4.8%

Earnst Partners, LLC ……………4.8%

Barclays Global Inv. …………….4.8%

Columbia Wanger Asset Mgt. …..3.5%

Capital World Inv. ………………3.5%

Vanguard Group …………………3.2%

Royce & Associates ……………..2.6%

 

If SRA shares return to a more typical valuation of even 21.5 times projected FY 2009 earnings it will reach $29.67 over the next 12 months. A lower than normal price/book value of 2.2x would lead to about $29.70. Thus, these shares offer a better than 27% upside from last week’s closing quote. 

Is that an achievable target? Sure. SRA’s shares peaked between $31.90 and $38.30 in each of the calendar years 2004-2005-2006-2007 and have already traded as high as $29.80 this year. With record numbers on tap that goal may very well prove to be too conservative.

This ‘National Security’ provider should also provide you with some financial security.

 

Disclosure: Author owns shares and is short options on SRA International.

 

Did you say you want a lower risk way to play SRA International?

Here’s an option combination play that provides a very nice 190 day return even if these shares stay unchanged or go down slightly:

…………………………………………………cash outlay…………….cash inflow

Buy 1000 shares SRX @ $23.35 ………………$23,350

Sell 10 December $22.50 Calls @ $3.10 …………………………………$3,100

Sell 10 December $22.50 Puts @ $2.00 ………………………………….$2,000

Net Cash Out-of-Pocket ……………………….$18,400

 

If SRX shares are $22.50 or higher on expiration date, December 19, 2008:

Your shares will be called [sold] for $22,500.

Your puts will expire worthless [a good thing for you, the seller].

You will own no shares and have no options exposure.

The $22,500 you hold represents a $4,100 profit on an $18,400 outlay or 22.2% cash-on-cash. This will happen if the shares stay unchanged, go up or if they drop to $22.50 [a 3.6% decline from your purchase price]. 

Not too shabby for just over six months and a stock that didn’t have to move up at all.

**********************************************************************

What’s your risk?

On the shares you bought your break-even is $23.35 less the $3.10 call premium = $20.25 /share. 

On the puts you sold the break-even is the strike price of $22.50 less the $2.00 put premium = $20.50 /share.

Your worst case scenario is to own 2000 shares of SRA International at an average net cost of $20.38 /share. 

That $20.38 break-even price is lower than the lows on SRX shares since early 2004, when EPS were $0.74 versus today’s $1.24. Book Value and Revenues have about doubled since early 2004 as well.

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