CACI International Inc.

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

CACI International Inc. is a provider of expertise and technology to government and commercial customers worldwide, with a focus on national security, intelligence, and modernization programs.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

CACI is a technology and professional services company that primarily serves government agencies. It offers expertise in areas like IT modernization, digital solutions, engineering, cyber security, intelligence, and data analytics. The company operates through a number of long-term contracts. Their business model revolves around winning government contracts, delivering services, and then renewing the contracts for future revenues.

Revenue Distribution

  • CACI’s revenue is derived primarily from contracts with the U.S. federal government, particularly the Department of Defense, the intelligence community, and other federal agencies.
  • A smaller percentage of revenues comes from contracts with commercial clients.
  • The company has two operating groups: Expertise, which comprises specialized professional services and solutions and Technology, which comprises technology solutions and IT modernization.

While CACI derives the majority of their revenue from the U.S. government and a portion from commercial business, in this report only those businesses related to government are examined due to data availability

  • Increased Government Spending: The U.S. government’s increased focus on national security and technological advancement translates into greater demand for CACI’s services.
  • Cybersecurity: Growing concerns over cybersecurity threats and data breaches are driving the need for robust security solutions, a key area for CACI.
  • Digital Modernization: Federal agencies are increasingly investing in modernizing their IT systems, a trend that aligns well with CACI’s core capabilities.
  • Shift toward cloud: Governments are increasing reliance on cloud-based IT solutions, presenting CACI with opportunities for related services.

Competitive Landscape

  • CACI operates in a competitive market with other large government contractors, specialized service providers, and technology firms.
  • Key competitors include companies like Booz Allen Hamilton, Leidos, and General Dynamics.
  • CACI competes based on its technical expertise, innovative solutions, project management capabilities, and the cost-effectiveness of their services.
  • Price-based competition is not very prominent as value offered is more important for government contracts.

CACI is known for its ability to use technology to solve challenging and complex issues facing the government.

What Makes CACI Different

  • Deep Government Expertise: CACI has decades of experience working with government agencies, providing it with a deep understanding of their requirements and processes.
  • Technological Edge: CACI uses innovative technologies such as artificial intelligence and machine learning to improve performance and efficiency of contracts.
  • Established relationships: CACI has formed relationships with important government contacts in its more than 60 years of business.

Financials

Revenue

  • Revenue for fiscal year 2022 was $6.6 billion, a 7% increase from fiscal year 2021.
  • Revenue is expected to reach ~$7 billion in fiscal year 2023.
  • CACI expects that revenues will continue to grow between 5% and 8% for the next couple of years.

Profitability

  • CACI generated $697.3 million in operating profit for fiscal year 2022 a jump of 5.3%.
  • The company also generated $306.7 million of net profit and $17.16 earnings per share in fiscal year 2022
  • CACI expects a 11.6% operating margin for the fiscal year 2023.

While the company is showing growth across the board, note that the net profit was $308.6 million in the previous fiscal year, indicating a 0.68% YoY decrease, and a sharp increase in operating expenses.

Cash Flow

  • CACI has generated a free cash flow of $519.1 million from continuing operations for fiscal year 2022.
  • The cash and cash equivalents at the end of fiscal year 2022 was $136.4 million.

CACI has a positive free cash flow which will allow it to continue to invest in growth opportunities. CACI has had good growth through its years and has been able to generate great returns

Balance Sheet

  • The balance sheet is generally healthy, with $6.7 billion in assets compared to $3.2 billion in liabilities.
  • Debt has increased, but is at a manageable level given the company’s cash flows and earnings.

Although the balance sheet appears stable, it is prudent to keep track of how rapidly CACI debt is increasing, to avoid overleveraging.

Recent Concerns and Management Response

  • Competition: CACI faces intense competition for government contracts, and the company’s ability to win and maintain them is crucial for its future growth. CACI is currently spending more on bids and has had recent success in bidding due to the implementation of new strategies.
  • Inflation: The current high inflationary environment in the world is raising questions on the financial side of the business and if CACI has enough pricing power to offset the inflation-driven cost increases. Management believes the company has been able to adjust its pricing power to reflect the inflationary costs, but this is something to monitor.
  • Changes in Federal Spending: The company is vulnerable to changes in the direction of the federal budget, which could affect its ability to win future contracts, or even the viability of the currently held ones.

Management believes these are manageable issues as they are continually looking at ways to improve their financial position, and have taken on strategies to be more competitive.

Moat Rating: 3/5

CACI has a moderate economic moat. Its consistent work with government agencies for long periods of time indicates the presence of some stickiness in its customer relations, but the competitive environment in federal contracting is fierce.

  • Intangible Assets: CACI’s long standing relationships with Government agencies, it has over 60 years experience, along with its name recognition and reputation helps in generating business, but this moat is dependent on the company’s ability to maintain its position.
  • Switching Costs: CACI benefits from moderate customer switching costs, as long term relationships with contracts generate high switching costs. However, the need for agencies to switch will depend heavily on price points which are always in competition.
  • Network Effects: There are no significant network effects for CACI.
  • Cost advantages: CACI does not have any inherent structural cost advantages other than through increased scale, which are limited.

Understandability Rating: 3 / 5

While CACI’s business model is fairly straightforward, some nuances make understanding complex.

  • CACI’s business model consists of winning government contracts, and the performance of these contracts is often not very well documented or laid out, making it difficult for an investor to make a good estimation of their future performance.
  • The company’s contracts and bidding strategies are pretty complicated, and can be confusing at first sight. The industry is very competitive, and it can be difficult to understand how CACI is better than other competitors.
  • CACI generates cash based on these contracts and other services provided, and for an investor to correctly value a business, one must correctly understand the underlying drivers.

Balance Sheet Health: 4 / 5

CACI has a fairly healthy balance sheet, with a decent liquidity and manageable debt. However, one should be cautious of a rapid increase in debt.

  • CACI’s cash flows have remained healthy over the past year and with a low level of short-term debt it will likely maintain this balance sheet position.
  • The debt levels are within acceptable margins, however, increasing costs and expenses could lead to a worse liquidity.
  • Although CACI has lots of intangible assets, it also has a significant amount of real assets.