How to grow rich with this little-known defense dynamo

by Beirne White, Special Projects Editor

When it comes to warfare, there may be only one thing that remains constant. And, not surprisingly, the same thing can be said of investing. It’s the groups that are smarter, faster, more dynamic and focused on the future that ultimately come out on top. Here at Taipan, we consider ourselves just such a group. We’ve made a lot of money by keeping a keen eye on what’s to come. We take a lot of pride in recognizing when new technologies and market forces will come together and produce a massive amount of wealth for those who get in ahead of the masses.

We think Anteon Corp. (ANT:NYSE) is this kind of opportunity.

Not your daddy’s defense
contractor

Anteon supplies state-of-the-art information technology (IT) and advanced engineering services to government clients. IT and systems engineering are their core businesses. They design, integrate, maintain and upgrade cutting-edge systems for national defense, intelligence, emergency response and other high-priority government missions.

As the probability of “five more years” of Bush, Cheney and Rumsfeld increases, so do the odds that this company will become the next Honeywell or General Dynamics. That’s because this administration’s priority is to move the military and intelligence agencies, as well as local, state and federal police and emergency response units, into a state of preparedness on an asymmetrical battlefield. Before the end of this decade, trillions of dollars will be spent on digital information and communication technologies and advanced weapons systems.

That’s great news for Anteon, because virtually all of its business is with the Federal government. A whopping 75% of its contracts are with the Department of Defense and the intelligence agencies. In addition, Anteon supplies all of the military services, nearly all of the cabinet-level agencies, and numerous other civilian and defense agencies within the government.

For the Federal Emergency Management Agency (FEMA), Anteon has already built a nationwide, distributed enterprise system that can be deployed in the event of a disaster to quickly assess damages, coordinate emergency response and manage payments for qualified losses. And today they are upgrading the system to include current web and wireless technologies.

Anteon has a highly diverse client and contract base with more than 600 individual clients and about 440 contracts. Several of these contracts are “umbrella” type agreements under which any federal government client can open task orders. These are commonly referred to as Government Wide Access Contracts, or GWAC’s. Anteon is a primary contractor on four of the five largest GWAC’s, and is currently working on more than 3,000 task orders.

Contract work

One of the best things about government work is the revenue visibility provided by long-term contracts. Anteon’s current backlog of about US$4.3 billion has an average contract period of performance of between four and five years. They have GWAC’s that extend for seven to ten years and one Air Force contract, awarded in December of 2000, that has a period of performance of 15 years. While these contracts typically comprise one or more base years extended by additional option years, it is extremely rare for a contract to be canceled or an option not to be exercised.

One of the significant trends that have taken place over the last five years is the downsizing of government personnel. This has led to contracts becoming larger and larger in size, because certain duties and expectations are now passed off to the systems providers. Contractors must be able to provide one-stop shopping—design a system, build it, deliver it, and train the work force. The bottom line here is that Anteon is certainly one of the companies that can deliver. And they’ve got the track record to prove it.

When it comes to government procurement, past performance is vital. Companies have to show a record of competence in delivering quality services within the same market space and the same skills that the new contract they’re bidding on requires. Anteon has a 26-year corporate history marked by continual growth in revenue and customer base. They’ve also won a bevy of prestigious awards (Cogswell, Hammer, Nunn-Perry), and have been rated with the top contractors by a number of major publications. They consistently rank among the top-performing information technology and engineering service providers to federal government clients based on customer evaluations, and they have received numerous industry accolades for performance excellence. As you might imagine, this stands them in very good stead as they bid for new business.

They compete

Anteon competes mostly with the larger defense bellwethers like Northrop, Lockheed Martin, and General Dynamics. But they’re also up against CSC and EDS in their federal business groups. And there are a few other midsized public technology players, like CACI, Titan and SRA, with which they compete from time to time.

Just how big is this market?

Currently, it’s more than US$100 billion and growing rapidly. Believe it or not, the industry started on a growth spurt long before September 11, 2001. Over the few years leading up to 9/11, the industry grew at 7% to 8% per year. As you might expect, acceleration in the growth of the industry since 9/11 has taken it up to 10% to 11% per year. And it’s predicted to continue to grow that way over the next three to five years, as the government buys technology to protect the homeland against terrorism.

One of Anteon’s most promising IT initiatives is combining information exchange and command and control expertise with the latest chemical and biological threat detection technologies. The result will be an automated, integrated and comprehensive chemical and biological threat management system called FAST (fluorescence-activated sensing technology).

This system will rapidly and simultaneously detect multiple chemical (nerve gases, cyanide, and mustard gases) and biological (all CDC-listed biological threat agents—e.g. anthrax, smallpox, plague, botulinus toxin) threat agents. FAST will identify these threat agents using multi-scan mass spectrometry combined with confirming DNA fluorescence technology.

The FAST detection strategy is coupled to an integrated, operational information system capable of notifying all relevant personnel of the nature of the threat, its location and needed countermeasures, as well as acting to limit relevant machinery systems (where implemented) to control spread of the threat.

On the borders

Another Anteon undertaking involves accounting for the massive flow of people and goods that cross our borders and enter our ports. This potential terrorist and weapons of mass destruction (WMD) conduit is where we are most vulnerable. The company that can reduce or neutralize these risks will be rewarded with government contracts of unprecedented scale.

Imagine the market for an “eye-on-the-badge” and “pocket eye” surveillance system that links a camera on a customs official to a database with face recognition capability. A similar link could be made between a database and an aircraft inflight video surveillance system.

Anteon is already providing detection, prevention, and consequence management for port and border control agencies with such things as OWL underwater surveillance systems, smart cards, handheld and desktop trace detection instruments, and wireless sensors. And with their significant operational experience with the Coast Guard, Air Force, Army, Navy, Marines, and Special Forces, they can test and validate these new port and border control procedures with realistic training, simulations, and exercises.

Getting the place wired

Linked Operations Center Europe (LOCE) is an Anteon-developed system to support web-enabled exchange and collaboration on operations and intelligence information. It provides near-real-time intelligence through imagery, shared early warning, and interfaces to US and NATO systems. LOCE provides secure capability for international coordination on counterterrorism and other security issues among NATO nations.

Building on LOCE’s success, Anteon’s Combined Enterprise Information Exchange System (CENTRIXS) is currently being deployed at the four geographic unified command centers. CENTRIXS is operational now, supporting coalition operations, intelligence, and information exchange in the global war on terror. More than 50 countries and hundreds of users are already connected by CENTRIX.

Anteon’s Secure Infrastructure for Rapid Information Exchange Solution (SIRIXS) meets the demands of today’s dynamic homeland security and emergency management agencies. SIRIXS allows local, regional, state, and government agencies and departments to rapidly exchange information. With SIRIXS, decision makers and first responders can assess available resources for daily operations and response during crisis, emergency, or disaster situations.

Of course, these are just a few of Anteon’s IT capabilities. There are literally dozens more of their systems that are currently operational. And many more that are still in development.

The most successful
shipbuilding program in US Navy history

There are 27 Aegis cruisers and more than 30 Aegis destroyers in the active US Navy fleet. There are approximately 20 more destroyers under contract, with the potential for an additional 10 destroyers. The older Aegis cruisers are scheduled to undergo an extensive conversion to upgrade their capabilities and retain them in the active fleet.

Since 1985, Anteon has provided combat systems integration and test support as a subcontractor to Lockheed Martin Naval Electronics and Surveillance Systems and to the Aegis program office. Anteon also provides engineering, technical, and administrative services for the Aegis combat system in US Navy cruisers and destroyers. Support services include installation and testing, interface data development, baseline configuration management and combat systems integration. Additionally, Anteon provides engineering, technical, and administrative support for the planning and execution of Aegis destroyer combat system ship qualification trials.

Anteon also has a growing Sensors Technology Division that is focusing on airborne sensor systems. This business area has numerous support and technology development contracts with the Air Force Research Laboratory, Sensors Directorate. Anteon is playing a vital role in bringing new and improved technologies to Air Force weapon systems to meet next-generation fighter requirements.

One such program involves automatic target recognition technology. You see, today’s combat environment is populated with mobile units (tanks, trucks, antiaircraft weapons, radar vans, ballistic missiles) that survive by constantly moving to new locations. Recognizing these targets is a prime concern for the military services tasked with destroying them. When a mobile vehicle is hidden under camouflage, or even ordinary trees, it becomes extremely difficult to locate and attack. Anteon’s ATR technology will provide the means to locate these mobile targets.

The numbers tell the story

Anteon’s growth has just started. And it’s directly linked to our new national awareness that terrorists can strike America within her borders. From January 1, 1996, to September 30, 2001, revenues increased at a compounded annual growth rate of 39%. Sales in 1999 came in at US$400.9 million with EBITDA of US$28.3 million. That’s up 76.9% from a year earlier when the company made US$16.0 million. In 2000 the trend continued. Sales grew to US$542.8 million, up 32%. EBITDA shot up to US$36.3 million. In 2001 it got even better. Sales grew to US$715.3 million, up 31.7%, with earnings of US$47.4 million, up 30%.

2002 also produced record numbers: for the nine months ended September 30, 2002, sales were US$608.9 million—up 15.6% from US$526.8 a year earlier. Profits rose 33.8% to US$47.1 million. It’s only common sense. You’re NOT going to have this kind of booming prosperity without a sharply rising stock price. And soon. Demand is about to go through the roof.

NOW is the time to buy!

Even at US$715 million for the last full fiscal year in 2001, this enterprise still has enormous room to grow. While US$715 million sounds like a lot, put in context of the entire defense market, it’s not. And that’s good news: there’s so much room to grow, it stretches out to the horizon and beyond. Let me be more specific so you can see exactly what I mean.

• Lockheed Martin: for the nine months ended 9/30/02, sales rose 13% to US$18.8 billion. Net income totaled US$875 million. (Their net income was more than this company’s sales!)
  
• The Boeing Company: for the nine months ended 9/30/02, net sales came in at US$40.4 billion with a net income of US$1.7 billion.
  
• Northrop Grumman: for the six months ended 6/30/02, net sales rose 50% to US$8.48 billion. Net income increased to US$319 million.
  
• General Dynamics: for the six months ended 6/30/02, revenue rose 18% to US$6.63 billion. Net income came in at US$492 million.

Here’s my point: compare sales of US$715 million to the billions upon billions you see above. There’s room to grow. When you buy this stock, you’re getting in at the very beginning of the long boom that’s just about to occur.

ANT:NYSE is currently around US$23, somewhere in the middle of its 52-week trading range of US$18.90 to US$29.35. At a current P/E ratio of just under 27, we think its upside for the next twelve months is upward of 100%.

Buy ANT:NYSE at up to US$24 as a long-term play on America’s newfound will to stake out its place in the world. •