Inside Wall Street: ICF misunderstood, mispriced

Consulting firms are critical to government and corporate America, but this one remains an undiscovered prize.

By Gene Marcial Mar 14, 2012 1:16PM

Image: Financial adviser talking with clients © NULL/CorbisAs corporate America continues to slash fixed costs and governments persist in shrinking budgets, the use of consultants has increased significantly. They have become a critical part of management in both the public and private sectors.


Yet investors haven't caught up with the idea that consultants generate a lot of innovative ideas and execute strategic policies for government agencies and commercial enterprises -- and make good money in the process.


One of these consulting firms is ICF International (ICFI), whose clients in government include the Department of Homeland Security, Environmental Protection Agency, and Centers for Disease Control. In the corporate world, its clients include JPMorgan Chase (JPM), Chevron (CVX), and Caterpillar (CAT).


While several large institutional investors have discovered ICF, most individual investors have yet to awaken to ICF's fast growth and its critical role in government and business. And its stock is priced attractively, trading at $25 a share -- stuck somewhere between its 52-week high of $29 and its low of $17. Some investors see the stock hitting close to its all-time high of $34 a share.


"ICF's allure is it works to help governments and businesses become smarter and more efficient, and such a business should always be a great business," says Matthew Liftin, a principal and portfolio manager of the William Blair Small-Mid Cap Growth Portfolio, which owns 11% of ICF.


He credits ICF's management with having a proven knack for making acquisitions that are accretive to earnings and enable the company to compete with the big boys in the industry and win large contracts.


In fact, ICF has demonstrated an ability to make "1 plus 1 equal 3" in generating incremental revenue from its acquisitions, which in part drives the company's growth. 


ICF's strength in the commercial sector "supports our thesis that the stock is misunderstood" and therefore underpriced, says Timothy McHugh, an analyst at William Blair. He rates the stock as "outperform." McHugh notes that ICF "continues to be incorrectly lumped with every other government consulting company," so he sees more upside potential for its stock price.


The stock's upside potential will be "driven by both earnings growth and a re-evaluation of the company as a broader business services company, rather than a government consulting company," says McHugh. The company is positioned differently from its peers in that ICF continues to see "extremely strong growth outside of the federal sector," with these revenues growing by 35% in the fourth quarter.


"We estimate that projects outside of the federal sector will account for slightly more than 40% of revenue and probably more than half of the company's profits in 2012," McHugh says. While the company is still valued as and primarily considered a government consulting company, "ICF's domain expertise in the energy, health and education sectors make the company very different from government consulting companies, which are focused on the defense sector and have limited opportunities to expand outside the federal sector," McHugh says.  


Among ICF's clients in the private sector are eBay (EBAY), Blackstone Group (BX), Constellation Brands (STZ) and Baltimore Gas & Electric. At eBay, ICF helped reduce greenhouse gas emissions, thereby improving the energy efficiency of the company's servers. For Blackstone and its clients, ICF designs and implements energy-efficiency and environmental-sustainability programs. And at Constellation Brands, ICF helps quantify and manage the carbon footprint of the company's global operations and distribution chain.


Right now, ICF is focused on more acquisitions in the private sector in an effort to bring into balance revenues from the government and commercial enterprises. The goal is to expand total revenues to more than $1 billion from 2011's $841 million. Although revenues from its government clients account for more than half of its total, ICF's commercial clients generate faster sales growth. In 2011, revenue from the commercial sector grew by 52%, while government advanced by just 2.7%.


ICF is usually in talks with 5-8 companies that can become potential acquisition targets, including some foreign companies, in the commercial sector. Its acquisitions average about two a year. ICF has made 10 acquisitions in the past five years, even as the company continues to focus on organic growth to reach its $1 billion to $1.04 billion revenue goal.


Sudhakar Kesavan, who became ICF's CEO in 1999, says acquisitions are made to expand the company's "domain expertise" in the U.S. and abroad in order to continue expanding margins. "We are looking at the healthcare, energy and Web-related digital businesses in our search for acquisitions," he says. Kesavan notes that ICF's backlog orders amount to $1.7 billion, with 44%, or $730 million already funded. "We are constantly looking for companies that will at least double if not triple their revenues after we have acquired them," he says.


To illustrate, in June 2007 ICF purchased Z-Tech Corp., whose revenues totaled $25 million, for $27 million in cash. By July 2008, ICF was awarded a five-year $60 million contract by the National Institutes of Health for information and technology support. Without ICF's scale and talent resources, Z-Tech on its own would not have been able to qualify to make a bid for the project. "It's a prime example of making one-plus-one equaling more than two or maybe even three," Kesavan says.


Another example: In March 2009 ICF purchased Macro International, whose revenues were about $150 million, for $155 million. Among other things, Macro provides research and evaluation in the area of HIV/AIDs, chronic disease prevention, and behavioral health. With Macro in the fold, ICF won a potential $4 billion grant over 10 years from the Centers of Disease Control and Prevention.


Analyst Tim Quillin of investment bank Stephens, who rates ICF's stock as "overweight," with a 12-month price target of $32, says ICF remains on track for growth despite headwinds related to its contracts with government agencies. "The stock looks cheap to us," he says, based on his earnings estimate of $2.10 a share for 2012, and $2.37 for 2013.


Correction: This post was edited to correct sales growth at ICF's government division (2.7%), the number of companies in talks that could be potential acquisition targets (5-8) and the year Kesevan became the CEO (1997).




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