Stanley Inc. (SXE) is trading sharply higher today after reporting earnings for the fiscal second quarter.  ZachStocks featured SXE last month noting that the company’s government contracts would likely drive growth in earnings.  Investors are quickly competing to buy shares after the announcement which not only showed strong growth for the quarter, but included strong guidance from management.

For the second quarter (ending in September) the company logged revenue of $217.1 million which was 14% higher than the same quarter last year.  The majority of this growth was organic, although three of the percentage points were due to an acquisition made earlier in the year.  Earnings were also strong with EPS coming in at $0.49, an increase of 32% above last year’s levels.

Stanley receives most of its revenue from government contracts as the company offers support initiatives for military and defense functions.  The earnings report noted the following business lines as showing particular strength:

• IT support systems for US Marine Corps
• Military intelligence training
• Operations support for US Army
• Biometrics software development
• Training and support for Dept. Of Defense
• Space & Navel Warfare Systems Command

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In addition to strong revenue and earnings growth, the company is showing more efficiency.  EBITDA profit margins came in at 10.7% for this quarter versus 9.9% in Q2.  Increased profit margins are due both to a more favorable business mix (contracts with higher profitability) as well as to strategic initiatives aimed at cutting back on administrative and overhead costs.

One of the more important metrics to consider is the company’s backlog of business.  Over the last three quarters, the level has remained relatively constant with a backlog of roughly $2 billion.  For a growth company like SXE, we would like to see this level increase which would indicate that the company is booking more contracts than it is fulfilling each quarter.  Management stated that delays in government procurement processes have kept bookings lower than they would like to see, but they anticipate an increase as these delays are resolved.  For now, it still appears that the company has more than 2 years worth of business to work on regardless of new contracts being inked.

Stanley’s second quarter of fiscal year 2010 demonstrated strong revenue growth and margin improvement, EPS growth and cash flow generation. Expected revenue contributions from recent new awards have enabled us to raise the midpoint of our fiscal year 2010 revenue guidance. ~Phil Nolan, CEO

Estimates for next year (fiscal year ending March of 2011) show analysts expecting $1.91 in earnings.  At the current price near $27, the stock is trading with a multiple of just 14.  This appears to be low considering the strong revenue growth and stability of the US government as a primary customer.  Over the next several months, I want to be involved in names that are less economically sensitive as we could very easily begin to see a “double dip” pattern in markets and in the economy.  SXE will likely offer more stability due to its long-term contracts and healthy backlog of business.

FD: Author does not have a position in SXE

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