ManTech International Corporation [MANT]

Profile: ManTech provides IT and Business Services and Solutions

to the US government, particularly the Department of Defense and
NASA. Solutions and services include intelligence,
communications, and security systems development and support.
ManTech also offers network design and installation.
Competitive Advantage: ManTechs moat develops from strong
management and expert employees, an established relationship
with the National Security Community and the lucrative opportunity
for growth in the US and abroad.
Investment Thesis: MANT increase portfolio value by exposure to
a solid growth sector in the short-run, with a company wellpositioned to sustain growth for shareholders in the long-run.

Stock Information
Ticker
Sector
Industry1
Industry2
Class
Mkt. Cap
Beta
Price
52 Wk Range
Shares

MANT
Tech
IT Services
Aero/Defense
Growth
$1.43B
0.49
$40.32
$37.07-62.06
35.5M

Key Ratios (TTM)

EPS
Price/Earnings
PEG (5yr Exp)
Price/Book (MRQ)
Price/Sales
Price/Cash Flow
EV/EBITDA
Current Ratio
Debt/Equity
Sales Growth
ROE
ROA

$2.55
15.84
0.91
2.05
0.75
11.24
8.40
1.49
0.00
29.20%
14.66%
9.84%

2007

2008

2009E

2010E

2011E

2012E

2013E

67,207

90,292

102,933

113,226

124,549

137,004

150,704

14,244

17,323

16,522

14,734

12,135

11,237

10,735

+ Int.

2,349

1,906

3,609

3,970

4,367

4,804

5,284

- CapEx

4,834

7,792

4,970

4,047

4,452

4,897

5,386

NI
+ Depr.

- NWC

61,100

(5,892)

17,524

14,269

15,696

17,266

18,993

FCFF

13,168

103,809

93,352

105,674

112,168

121,275

131,776

WACC

8.05%

PV of CF

$2,133,302

Growth (LT)
Terminal
Value
Total CF

3%
$2,687,714

+Cash
-LT Debt

4,375
--

$564,245

Equity
Value

$2,137,677

Recommendation: Buy Full Position 1,100 Shares

Report written by: John Hammon, Janelle Heim, Jay Hammond, and Pete Markovich

Shares
Out

35,500

Share
Value

$60.22

Table of Contents
Business Profile ....................................................................................................................................3
Operating Segment Analysis ................................................................................................................4
Recent Company News

............................................................................................................5

Management.........................................................................................................................................5
Growth Strategy....................................................................................................................................7
Macroeconomic Environment ...............................................................................................................8
Industry Analysis...................................................................................................................................8
Competitive Advantages.......................................................................................................................9
Competitors ........................................................................................................................................10
S.W.O.T. Analysis...............................................................................................................................12
Porters Five Forces............................................................................................................................13
Investor Relations Interview................................................................................................................14
Whos Buying Now? ...........................................................................................................................15
Analyst Recommendations .................................................................................................................15
Price Performance ..............................................................................................................................15
Price Multiples Comparison ................................................................................................................16
Relative Valuation...............................................................................................................................17
Financial Ratio Analysis......................................................................................................................18
Pro Forma Income Statement.............................................................................................................23
Pro Forma Balance Sheet ..................................................................................................................25
Discounted Cash Flow........................................................................................................................26
DCF Sensitivity Analysis.....................................................................................................................29
Economic Value Added ......................................................................................................................30
H-Model DCF Valuation......................................................................................................................30
Investment Recommendation .............................................................................................................31
Consolidated Financial Statements ...................................................................................................32
ValueLine............................................................................................................................................35

P a g e |2

Business Profile1
Company Overview
ManTech (MANT) was founded in 1968, went public in February 2002, and is headquartered in
Fairfax, Virginia. ManTech International Corporation is a leading provider of information
technology solutions to the United States government, as well as governments around the
world. Its customers include the U.S. Army, the Defense Intelligence Agency, the Department of
Defense, the Department of Homeland Security, the Department of State, NATO, NASA, and
many more. ManTech operates within the United States and 40 other countries around the
world and currently employs approximately 8,000 employees that concentrate on a bevy of
operations ranging from systems engineering to cyber security and from intelligence operations
to global logistics and supply chain management. These employees are highly trained with
approximately 42% of them having Top Secret clearance with government projects. Rather than
a large corporate division, ManTech employs a strategy of focusing on four business units to
deliver excellent service and unified solutions to the National Security market.
Strategic Business Units

ManTech Defense Systems Group (DSG)

This business unit focuses on providing technological support to the United States armed
forces. This unit is made up of two subsidiaries, ManTech Telecommunications and
Information Systems Corporation (MTISC) and ManTech Systems Engineering Corporation
(MSEC). MTISC focuses on the design, development and installation of telecommunication
and information systems. MSEC focuses on training development, software engineering and
logistics and management.

ManTech Information Systems & Technology (MIST)

MIST works with clients to determine their objectives and tailor solutions to fit their needs.
This business unit includes ManTech MBI, Inc. (MMBI), which is a secure information
sharing and IT solutions provider to the federal government with a focus on the Department
of Defense, Intelligence Community and Homeland Security markets. This unit is trained in
ManTechs technologies and familiar with problems that arise and are equipped to provide
solutions to clients.

ManTech Security & Mission Assurance (MSMA)

MSMA provides analysis, full life cycle security, critical infrastructure protection and cyber
support services to client operations that address all aspect of the clients business. This
business unit is separated into three separate segments in order to address clients needs
more thoroughly: Operations and Security, Strategy and Analysis, and Cyber.

ManTech SRS (MSRS)

MSRS is ManTechs engineering and information systems development segment. It has a
long history in the design, development and evaluation of new technologies. ManTech
Space Systems (MSS), the business located in this segment has developed a great
relationship with the space community and has developed a variety of space systems and
information technology to federal and civil space communities. MSS also has agreements to
work with NATO in Iraq and Afghanistan.

ManTech website, company history

P a g e |3

Operating Segment Analysis

Types of Contract Services
ManTech has three types of contracts that it enters into when starting a project for the federal
government. Since the contracts originate with the US government, there is very little risk of
default. The most significant risk ManTech is exposed to would be the potential to
underestimate the cost of completing a project, thereby reducing operating profits. The three
types of contracts are Cost-Plus, Time and Materials, and Fixed-Price. As seen below, the
concentration of contract percentages has been fairly consistent in recent history, with the
largest allocation to Time and Materials Contracts. While this increases risk slightly for the
company, it also allows for greater upside potential as labor and expenses are contracted at a
negotiated rate, which could be significantly less than a cost-adjusted contract.

Cost-Price Contracts:
ManTech is reimbursed for allowable costs and paid a fee which could be performance
based or fixed. As long as the costs incurred under these contracts are under the
compensation ceiling, ManTech is entitled to be reimbursed plus a profit.

Time and Materials Contracts

These contracts allow ManTech to be paid based on a negotiated rate for labor and
expenses. ManTech assumes a greater financial risk here because they agree upon the job
at a negotiated rate.

Fixed-Price Contracts
This type of contract requires ManTech simply to perform the task for a fixed-price. These
have the opportunity for greater margins but have greater financial risk because of the
possibility for going over with costs or underestimating the cost of the project.

P a g e |4

Recent Company News

March 24, 2009 BroadPoint AmTech analyst Peter Arment said he expects profit this
year and next to be below Wall Street expectations, citing uncertainty surrounding the
company's leadership and other issues. He downgraded the stock to Neutral.

March 20, 2009 Wachovia upgraded ManTech stock to outperform.

March 4, 2009 ManTech shares fell sharply when Robert Coleman, the President and
Chief Operating Officer of ManTech, announced he would be resigning, but will remain
on the companys Board of Directors.

February 26, 2009 ManTech announced that its revenues grew in the fourth quarter,
aided by its acquisition of Emerging Technologies Group, and that its profits rose by
15%. Management also predicted that it expected first quarter revenue to grow by 1419%.

Other recent events include ManTech winning a two-year army contract worth $355M to
support MRAPs in southwest Asia. ManTech also recently named Louis M. Addeo to
the position of President of Defense Systems Group.

Management2
George J. Pedersen Chairman of the Board, CEO, and Co-Founder

Mr. Pedersen is Chairman of the Board, CEO and Co-Founder of ManTech

International. He also serves as a member of the Board of Directors and
Executive Committee of the National Defense Industrial Association
(NDIA), Chairman of the Board for the Institute for Scientific Research
(ISR), and Chairman of the Board for GSE Systems. In February 2008, Mr.
Pedersen received a Federal 100 Award from Federal Computer Week. He
was chosen for having a significant influence on how the federal government
buys, uses and manages information technology, and for a risk-taking, vision and pioneering
spirit in the federal IT community.
Jay W. Kelley President of Space Systems Business Unit
Mr. Kelley is President of ManTech's Space Systems business unit. Mr. Kelley
joined ManTech in April 2003 and was appointed to his current position in
April 2004. Previously he was Vice President of Mid-West Operations. He has
additional professional experience as the chief operating officer for STA, Inc.,
and later, Vice President for Military Programs for Lockheed Martin.
2

www.mantech.com, corporate governance

P a g e |5

Kevin M. Phillips Chief Financial Officer

Mr. Phillips is the Chief Financial Officer of ManTech International
Corporation. He previously worked as Chief of Staff at ManTech where he
played an active role in the integration of acquisitions and other strategic
business issues. Prior to that, he held various roles including controllerships
in IT services providers to the government.

James N. Allburn President of ManTech SRS Technologies

Mr. Allburn is the President of ManTech SRS Technologies, Inc., a
subsidiary of ManTech International Corporation since May 2007. Prior to
ManTech, he worked as COO or SRS Technologies and served in the Air
Force for 23 years working on research and development.

James D. Bryan President of Defense Systems Group

Major General James D. "Dave" Bryan, U.S. Army (Ret.) is the President of
ManTechs Defense Systems Group (DSG), its largest subsidiary. Prior to
joining ManTech International Corp. in 2008, Mr. Bryan worked as a Vice
President for competitor, Northrop Grumman. Mr. Bryan also served 34
years in the United States military.

Kenneth J. Farquhar President of ManTech Systems Engineering

Corp.
Mr. Farquhar is President of ManTech Systems Engineering Corporation
(MSEC). Mr. Farquhar joined ManTech in 1995 as a Vice President
managing MSECs Engineering and Systems Support Group, and was
named President of MSEC in December 2003. He has also served in
positions related to research and development of technology within the
military.

Kurt J. Snapper President of ManTech Security Technologies Corp.

President of ManTech Security Technologies Corporation, Senior Vice
President and Director of Advanced Programs, Mr. Snapper joined
ManTech International Corporation in 1989, and was responsible for
developing and managing security and risk management programs. He was
named president of ManTech Security Technologies Corporation when it
was formed in 2000.

P a g e |6

Growth Strategy3
ManTechs Five-Part Growth Strategy
1. Grow our business as a premier provider of comprehensive information technology
and technical services solutions to the federal government. ManTech has nailed this
part of their strategy by hiring the best employees and management team possible.
Members of ManTech are experts in their field that are lent credibility through their personal
experiences and innovation in the IT defense field.
2. Expand our customer base by broadening the scope of services we provide to
existing customers and by attracting new customers. ManTechs customers, namely
parts of the federal government, have been extremely loyal to the company because of its
ability to deliver a single integrative approach in its solutions. The credibility and expertise
ManTech has in this area allows the company to cross-sell products to existing customers
while attracting new ones.
3. Expand our service offerings in high growth program areas. ManTech is focusing its
efforts on supporting the departments involved in the Global War on Terror and customers
looking to improve their information technology infrastructures.
4. Continue to attract and retain skilled professionals. ManTech targets employees that
have experience as engineers, scientists, and officers. The company retains them through
offering generous compensation and incentive plans.
5. Continue our disciplined acquisition strategy. ManTech selectively selects companies
management believes will enhance ManTechs position within the industry and allow for new
customers. The company has acquired 13 companies since going public in 2002 which has
accelerated revenue growth.

Revenue Growth Analysis4

Year-over-Year

2008

2007

2006

2005

2004

Sales Growth
EPS Growth

29.20%
30.77%

27.34%
30.87%

16.00%
12.03%

18.55%
75.00%

23.93%
-30.28%

Over a 5-year average, ManTech has sustained a sales growth rate greater than 20%, making
MANT a leader in the industry. MANT has also effectively employed cost control measures to
not sacrifice profit margins for sales growth, as evidenced by the growth in Earnings per Share
exceeding growth in Sales. The excellence in growth rates can be attributed to ManTechs
ability to win contracts in a competitive market as well as an aggressive acquisition strategy.

3
4

www.mantech.com
Morningstar key ratios: ManTech

P a g e |7

Macroeconomic Environment5
Economists offer a bleak outlook for 2009, even after trillions of dollars of support being offered
by the United States Government. Unemployment is roughly 8% for the first time in decades,
stripping state governments of cash. Consumers are no longer facing relief from declining
energy prices, as oil has bounced back to above $50 per barrel. Consumer spending has also
decreased, and protectionism has resurfaced after years of beneficial international
interconnectedness. The United States Government has recently begun buying Treasury Bonds
in record volume in order to infuse capital into the staggering economy. The result of this has
been a depreciated dollar, and harmed revenues from companies highly invested in foreign
markets.
ManTech is mostly unaffected by the current economic conditions. The balance sheet shows
zero LT debt, and nearly all of their revenues are generated within the United States, eliminating
any exchange rate risk created by the Governments printing of money. ManTechs clients also
provide safety, as products are in high demand by government security agencies and the
Department of Defense as well as organizations such as NASA.

Industry Analysis
The U.S. Government is the largest consumer of information technology services in the United
States. Due to the increasing need to maintain its edge in a world with ever-present threats from
rogue nations and terrorists to new, unimagined attacks from domestic hackers, forecasts lead
that the U.S. government will maintain spending on updating technology. Government spending
on IT services has increased steadily since 1980 and analysts predict continued growth from
$72 billion FYE 2008 to $88 billion in 2013. These predictions also dont consider any spending
on confidential government programs needing IT solutions to go forward.
The four main drivers of revenue growth for companies in the Information Technology industry
and the Aerospace & Defense industry will be:

Spending on Defense and Intelligence during the War on Terror

Even with the change of administrations, the defense industry is continuing to see more and
more spending come its way in order to fund operations in Iraq and Afghanistan. Analysts
believe that this trend should continue in the foreseeable future since the threat of terrorism
has not diminished.

Spending on Cyber Security

The former administration created the Comprehensive National Cyber Initiative which
focuses on securing the governments systems and should last the next 10 years. Spending
in this area is expected to grow from $7 Billion in 2008 to $15 Billion in 2013.

Livingston Survey; wsj.com

P a g e |8

Focus on Integrating Systems to Improve Information Sharing

New sources and ease of access to information, namely through Internet sites, continues to
ensure that the US government needs to step-up their ability to efficiently extract and
analyze information, consequently making it even more important for government agencies
to communicate clearly with one another.

Reliance on Technology Service Providers

The government will likely have to rely on individuals with experience working in the area of
their specific technology in an effort to maximize potential effectiveness and maintain
operations.

As of March 25, 2009, the Security Services industry is down 18.45% and Aerospace & Defense
is down 23.29% YTD, vs. the S&P 500, down 10.74% YTD. This can primarily be seen as the
market beating down the industry, as growth is likely to be sustained in the immediate future.
President Barack Obama recently announced that he will make cyber security the top priority
that it should be in the 21st century.6 This helps to support analysts predictions for growth in
the defense IT sector; a sector in which ManTech is optimally positioned to capitalize on returns.

Competitive Advantages

Mission-critical technology solutions

ManTech has gained expertise in the industry through rigorously training individuals in
developing optimal solutions, which is impossible to replicate precisely and a cost-barrier for
competitors

Trusted partner to intelligence and defense communities

ManTech has been involved with the Department of Defense and Intelligence communities
for years and has proven itself has proved itself as a reliable provider of custom IT solutions.

Expanding global presence

ManTech employs approximately 8,000 highly skilled people to manage global operations
throughout 42 states and 40 countries. This widespread international presence allows
ManTech to spread its core competence across the globe, reaching to untapped markets for
growth potential.

Highly dedicated and cleared personnel base

ManTechs management is well established for practices in leading and managing defense
companies and army units. This notion, coupled with years of expertise in cyber IT solutions
provide an excellent foundation to foster relationships within the government leading to
winning highly valuable contracts and experiencing sustained revenue growth. ManTechs
employees are also given high levels of responsibility, with over 40% having top-level
security clearance on classified projects.

http://www.forbes.com/2008/12/18/cybersecurity-czar-obama-tech-security-cx_ag_1219cyberczar.html

P a g e |9

Competitors7
Information Technology
Computer Sciences Corporation (CSC)

Computer Sciences Corporation provides consulting and outsourcing services in the Information
Technology industry. CSC provides systems integration and other technology services,
including application development, data hosting, and management consulting services. Similar
to ManTech, CSC is also a large government and defense contractor, with about one third of
sales attributable to federal agencies. CSC acquired DataTrac in 2006, the primary contract for
the Department of Homeland Security. CSC currently holds long-term contracts with AON,
Ascension Health and Sun Microsystems.

CACI International (CAI)

CACI International focuses most company efforts on contracts with the United States
government, and more specifically the Department of Defense. 95 percent of operating
revenues are derived from the U.S. government and more than 70 percent from the Department
of Defense. CACI International is one of the largest Information Technology service contractors
for the government. The growth strategy for CAI is focused mostly on external growth, rather
than organic growth. CACI plans to acquire smaller companies that currently serve the
Department of Defense. Recent acquisitions for the company include the Institute for Quality
Management and Wexford Group in 2007. Currently less than 5% of CAI revenues come from
overseas, however the company is beginning to expand globally.

SRA International (SRX)

SRA International also contracts with the United States government in the Information
Technology sector. However, SRA International primarily serves the Food and Drug
Administration, the Internal Revenue Service, and the Department of Defense. SRX is
concerned with the national security side of IT, with more than half the companys sales
resulting from national security contracts. SRA International also operates in the public sector,
with approximately one-third of contracts being civil contracts. Acquisitions also play a large role
in the growth strategy of the company. Recent acquisitions include Touchstone Consulting
Group and Spectrum Solutions Group.
7

Hoovers Premium Company Overview, www.hoovers.com

P a g e | 10

Aerospace and Defense

Lockheed Martin Corporation (LMT)

Lockheed Martin is the #1 defense contractor for the United States government, focusing on the
pure-play of aerospace and defense products. 85% of operating revenues come from U.S.
government contracts, which provide stability in the aerospace industry, but also exposes the
company to the significant risk of government spending cuts. The business segments include
Aeronautics aircraft products and services, and Space Systems satellites and strategic
missiles. The effects of the Obama administration projected defense spending cuts are
predicted to negatively affect current programs. LMT is currently partnering with competitors
Northrop Grumman and Alliant TechSystems to design and develop weapons technologies,
bridging the gap between the weapons market and aeronautics.

Northrop Grumman Corporation (NOC)

Northrop Grumman Corporation is the largest shipbuilder in the United States and the 3rd largest
defense contractor. Northrop Grumman is the most internally diverse company in the peer group
analysis, as they operate in five sectors: Aerospace Systems, Electronic Systems, Information
Systems, Shipbuilding, and Technical Services. NOC is another government-dependent
company with 90% of sales coming from contracts with the United States government. Northrop
Grumman also focuses on a line of high-profile products, including the B-2 stealth bomber,
assault ships, and oil tankers. The acquisitions of Newport News, Litton, and TRW strengthened
the companys operations in command and control systems. Northrop sold more than 80% of
the company business to Blackstone Group to pay down debt in 2005. Cuts in military spending
are likely to have a strong negative impact on earnings. NOC just began expanding their IT
sector in late 2008, a potential growth strategy for the company.

General Dynamics (GD)

General dynamics is the Pentagons 4th largest pure-play defense contractor, followed by
Lockheed, Boeing, and Northrop Grumman. General Dynamics offers capital products and
services in four areas: Command and Control Systems, Marine Systems, Combat Systems, and
Aerospace. General Dynamics has focused their growth strategy internationally, recently
acquiring Switzerland-based Jet Aviation, which provides services in Asia, Europe, Middle East,
and the U.S. The United States government also accounts for a substantial portion of company
performance, with more than two-thirds of revenues from U.S. contracts. The downturn in the
economic environment has also decreased the appetite for business jets, driving down recent
sales. However, these risks can potentially be offset by the recent increase in revenues from
aircraft services.
P a g e | 11

SWOT Analysis
-

Strengths
Strong Management and Employees The head officers at ManTech have their jobs because
they have years, even decades, within military and government branches, as well as leading
management in companies similar to ManTech ( Management and employees are recognized by
major publications and clients for innovations.

Ability to win new contracts While ManTech is working for a customer, they are constantly
looking for ways that the company can add value by integrating the clients IT further. ManTechs
solid business development pipeline provides significant opportunities for organic growth.

Large Backlog of Orders ManTech has total backlog of $4B and a funded backlog of $1.2B,
which equals roughly 50% of estimated 2009 revenue.

Strong Balance Sheet ManTechs financial strength will allow the company to continue to grow
organically as well as make strategic acquisitions. The company also has access to a revolving
credit line of $300 million which could come in handy during the economic crisis.
Weaknesses
- Reliance on Government Expenditures ManTech must be able to win contracts with the
government and the government must be willing to spend on ManTechs services. Without new
contracts, itll be tougher to have organic growth in the future.
-

International Business Even though it is a small part of revenues, working internationally can
be difficult because ManTech must comply with legislation not only from the United States but of
the individual countries it is working in. This could impact performance in this area.
Opportunities
- Need for IT Solutions IT is always changing and companies will are searching for ways to
integrate their current systems. This means a need for MANT services in the foreseeable future.
-

Continued War on Terror As long as terrorist threat exists, government will protect the country
from attacks. ManTech specializes in IT that aids intelligence gathering and computer protection.

Comprehensive National Cyber Initiative This plan has funding of $7B and forecasted to
grow up to $15B in 5 years. ManTech is in a great position to win funds because of experienced
personnel and relationships that make the company look reliable to partner with in the War on
Terror.

International Growth Global business makes up 1.1% of ManTech revenues. Governments

and NATO have the same need for integrating systems, so there is a large market for ManTechs
services.
Threats
- Transparency on the War Front Past 2010, revenues coming from Iraq and Afghanistan
become a little fuzzier because policy in the region has not been completely hammered out yet.
-

Recession Current economic crisis could encourage national budget cuts for IT, though
appears limited by the Comprehensive National Cyber Initiative, having $7B set aside for cyber
upgrades.

Robert Colemans Departure Robert Coleman, President and COO, will resign. Some analysts
speculate a negative impact on growth believing he led to becoming a market leader in defense
IT.
P a g e | 12

Porters Five Forces

Barriers to Entry The barriers to entry into defense IT are high. ManTech is in an excellent
position in this industry because it already has the experienced personnel with necessary
clearance to work on classified government work, as well as an existing relationship with a
majority of the government departments that need cyber protection and information systems.
Supplier Power This has a negligible impact on business.
Buyer Power ManTech has been able to prove itself as one of the best in the industry and
has been awarded many major contracts over the past few years. ManTechs history of
excellence and concentration on providing customer satisfaction should keep it high on the
governments list of IT outsourcing companies.
Threat of Substitutes ManTech provides a quality product that is developed and tested by
some of the brightest minds in the industry. It is unlikely that the government would switch
providers for cost reasons as long as ManTech continues its streak of excellent products.
Rivalry ManTech is in a very good position to be highly competitive with those in its peer
group because of its competencies in management and employees, research and development,
and service.
P a g e | 13

Investor Relations Interview

The following questions were prepared to ask Investor Relations. As of March 26th we have not
received any responses to attempts to speak with IR. If we can set-up an interview before the
presentation responses will be handed out.
1. How do you think will the new administration affect your business?
2. Is there any indication that some of your programs might be cut?
3. How will draw downs in US forces in Iraq affect your business? Specifically, your
work with MRAPs (mine-resistant vehicles): Will the contract be renewed?
4. How has the current recession affected business?
5. Is there anything ManTech is doing to take advantage of the recession?
6. Seeing how you are in between the IT industry and the Aerospace & Defense
industry, which do you view as your primary competitors?
7. What sets you apart from them?
8. How does ManTech intend to attract contracts not originating from the
government?
9. Does management believe there is room for growth in this area?
10. What are the companys expectations for growth this quarter? What are the
companys expectations for growth this year?
11. What makes up the amount of goodwill on ManTechs balance sheet? Is such a
large amount normal for the industry?

P a g e | 14

Whos Buying Now?8

Insider Activity Last 6 Months

Shares

Transactions

Total Share Purchases

N/A

Total Share Sales

86,367

Net Shares Purchased (Sold)

(86,367)

Total Insider Shares Held

719.21K

N/A

% Net Shares Purchased (Sold)

(10.7%)

N/A

Analyst Recommendations9
Current
Month

1-Month Ago

2-Months ago

3-Months ago

Strong Buy

Buy

Hold

Underperform
Sell

0
0

0
0

0
0

0
0

Recent upgrade to Outperform by Wachovia and a neutral rating from AmTech Research

Price Performance

8
9

www.morningstar.com
www.finance.yahoo.com/MANT

P a g e | 15

Price Multiples Comparison10

ManTech Historical Price Multiples
P/E
P/B
P/S
P/CF

TTM
15.4
2.0
0.7
11.0

2008
21.2
2.8
1.0
15.1

2007
22.5
2.7
1.0
23.9

2006
22.5
2.7
1.1
14.7

2005
17.4
2.4
0.9
15.0

2004
31.3
2.4
0.9
28.5

The turbulence in the market and economy caused prices of stocks to drop dramatically, which
in turn lowers price multiples. ManTech is undervalued because the company is not
experiencing decreased demand and earnings due to mismanagement; it is experiencing
increased earnings.

Relative Multiples: Information Technology

P/E
P/B
P/S
P/CF
Current Price

MANT
21.2
2.8
1.0
15.1
$40.32

Peers
10.5
1.1
0.4
7.2
-

CSC
6.1
1.0
0.3
3.2
$36.47

CAI
12.4
1.2
0.4
6.9
$36.04

SRX
13.0
1.1
0.5
11.6
$14.06

ManTechs P/E, compared to its peers in this industry, seems to indicate the company being
overvalued. However, CSC, CAI, and SRX are IT business service companies not experiencing
the constant revenue growth from government contracts as ManTech. CAI and SRX are the two
companies in the peer average closest in valuation to MANT; however they are smaller
companies competing for market share of government contracts. The CSC multiples also
decrease the peer average.

Relative Multiples: Aerospace & Defense

P/E
P/B
P/S
P/CF
Current Price

MANT
21.2
2.8
1.0
15.1
$40.32

Peers
7.6
4.0
0.5
9.8
-

LMT
8.7
9.4
0.7
19.8
$68.09

NOC
1.2
0.4
4.4
$42.22

GD
6.4
1.5
0.5
5.1
$39.50

ManTechs P/E, compared to its peers, indicates it is overvalued. However, LMT, NOC and GD
are larger, older companies not experiencing the same growth as MANT. NOC and GD have
much lower ratios as IT is a small part of their business, with manufacturing combat jets,
vehicles and other combat support as the bulk of revenues. LMT has a better mix of developing
and IT similar to ManTech. This allows a better comparison and shows ManTech is more
undervalued by the market than LMT when it comes to P/CF.
10

Morningstar Valuation Ratios

P a g e | 16

Relative Valuation
Looking at historic multiples for MANT and comparative multiples for the industry and
competitors provides the following forecasted valuation. To assess value, multiples are
weighted by perceived market importance, with Price/Earnings as the greatest weight at .40.
P/E appears to be the best indicator for value, as the market responds to changes in earnings
more immediately than other underlying performance metrics. P/B, P/S, and P/CF carry
respective weights of .30, .20, and .10.

Relative to Recent History

P/E (ttm)
P/B (mrq)
P/S (ttm)
P/CF (ttm)
Relative Price

Current
Multiple
16.22
2.10
0.78
12.27

Historic
Avg.
23.10
2.60
1.00
18.27

Current
Price
40.32
40.32
40.32
40.32

Relative
Price
57.42
49.92
51.69
60.04

Current
Multiple
16.22
2.10
0.78
12.40

Industry
Avg.
27.2
1.8
2.2
9.1

Current
Price
40.32
40.32
40.32
40.32

Relative
Price
67.61
34.56
113.72
29.59

Peer
Average
9.33
2.85
0.47
6.38

Current
Price
40.32
40.32
40.32
40.32

Relative
Price
23.18
54.72
24.19
20.75

Weight
0.40
0.30
0.20
0.10
$54.29

Relative to Industry
P/E (ttm)
P/B (mrq)
P/S (ttm)
P/CF (ttm)
Relative Value

Weight
0.40
0.30
0.20
0.10
$63.12

Relative to Peer Group

P/E (ttm)
P/B (mrq)
P/S (ttm)
P/CF (ttm)
Relative Value

Current
Multiple
16.22
2.10
0.78
12.40

Weight
0.40
0.30
0.20
0.10
$32.60

MANT shows attractive upside potential in relation to recent history and the industry, at $54.29
for recent history and $63.12 for the industry. MANT indicates a highly undervalued investment,
outside the 15% Margin of Safety. However, valuation relative to the peers indicates overvalued,
but isnt highly indicative of MANT, as peers offer significantly different services, so multiple
comparison gives little value to begin with. NOC was excluded from the average P/E, as they
reported net losses for 2008.
We have strong conviction in the recent history and industry valuations. The performance
factors driving multiples are affected by competitors; in a competitive, changing sector, recent
history is noteworthy.
P a g e | 17

Financial Ratio Analysis

Profitability Analysis
Historical Trends
2008

2007

2006

2005

2004

Gross Margin

16.34%

16.16%

16.97%

17.79%

18.10%

Operating Margin

8.20%

7.85%

7.97%

8.59%

8.28%

Profit Margin

4.83%

4.64%

4.46%

4.51%

2.99%

ManTech has maintained reasonably consistent profit margins across the board the last five
years. The slight decrease in gross margin results from an increase in costs of developing and
testing security software systems. ManTech did a good job of controlling operating expenses
during the recessionary 2008 year, leading to a higher Operating Margin. In 2008 the company
didnt record any losses from discontinued operations such as previous years, also contributing
to higher Net Profit Margin.

Information Technology
MANT

Peers

CSC

CAI

SRX

Gross Margin

16.34%

26.23%

20.29%

32.84%

25.55%

Operating Margin

8.20%

6.74%

5.56%

6.73%

7.92%

Net Profit Margin

4.83%

3.87%

3.30%

3.44%

4.86%

ManTech is closer to peers in IT Services, as operations and business structure align similarly.
It is difficult to determine an exact comparison as competitors compete substantially more in the
public arena, with different operating results. Gross margin gives an example of this difference,
with ManTech lagging in the industry. However, operating expenses for the peer group are
extensive enough to make up the difference, allowing MANT to take industry lead for Operating
Margin and Net Profit Margin.

Aerospace & Defense

MANT

Peers

LMT

NOC

GD

Gross Margin

16.34%

15.83%

10.88%

18.26%

18.33%

Operating Margin

8.20%

8.05%

12.01%

-0.33%

12.47%

Net Profit Margin

4.83%

4.05%

7.53%

-3.78%

8.39%

Relative to the Aerospace and Defense industry, ManTech has a comparable gross profit
margin, but lower operating margin and Net Profit Margin. General Dynamics leads the industry
for profit margins, but not an important measure of comparison for ManTech, as they contract
with the government for manufacturing of aircrafts and aircraft parts, notably distinguishable
from ManTechs contracts for defense IT solutions and services.
P a g e | 18

Financial Strength Analysis

Historical Trends
2008

2007

2006

2005

2004

Quick Ratio

1.44

1.17

2.19

1.59

1.73

Current Ratio
Debt/Equity Ratio

1.49
0.00

1.23
0.07

2.33
0.00

1.67
0.00

2.00
0.00

Financial strength for MANT is strong for the last five years with current and quick ratios
indicating a current asset position averaging 1.5x the current liabilities position. This liquidity
measure has become more important with recent credit market conditions resulting in an
inability for to borrow short-term funds easily and at lower rates. The increases in current and
quick ratios signify managements awareness of potential problems and efforts to hedge against
that risk by increasing liquidity.

Information Technology
Quick Ratio
Current Ratio
Debt/Equity Ratio

MANT
1.44
1.49
0.00

Peers
1.73
1.88
0.48

CSC
0.92
1.24
0.48

CAI
1.99
2.08
0.76

SRX
2.27
2.34
0.22

In the peer group comparison, MANT is less strong in the IT industry in terms of liquidity. This
isnt a significant concern given that ManTech has confidence in future revenues due to
government contracts while both industry leaders, CAI and SRX, compete for public contracts
as well as government contracts, yielding a higher financial risk. Looking at the Debt/Equity
ratio, ManTech is clearly the industry leader, due to being solely financed by equity, with the
exception of 2007.

Aerospace & Defense

Quick Ratio
Current Ratio
Debt/Equity Ratio

MANT
1.44
1.49
0.00

Peers
0.69
1.05
0.61

LMT
0.79
1.01
1.24

NOC
0.80
0.97
0.29

GD
0.49
1.15
0.31

In comparison to the Aerospace and Defense peer group, ManTech again is the market leader.
This should be expected due to the capital intensive nature of aerospace and defense
production companies. The current ratio is the closest in terms of comparison, but the difference
in quick ratios would indicate that a large portion of CA accounted for in the current ratio are
held in inventory for the competitors and held in cash and receivables for MANT.

P a g e | 19

Asset Management Analysis

Historical Trends
Total Asset Turnover
Fixed Asset Turnover
Accounts Receivable
Turnover
Working Capital Turnover
Average Collection Period

2008
1.83
112.96

2007
1.54
102.19

2006
1.85
81.92

2005
1.76
83.69

2004
1.77
97.23

4.59
13.29
78.36

4.29
21.17
83.89

4.81
6.76
74.85

4.09
9.46
88.02

4.22
6.51
85.37

ManTech effectively increased sales revenue per dollar of assets held over 5-yr recent history,
as shown by increasing total and fixed asset turnovers. Performance in 2007 is inconsistent with
average turnover; an increase in CA resulted in assets not utilized optimally and a lower TATO.
ManTech borrowed LTD in 2007 but classified it as current portion, decreasing working capital
and increasing NWC turnover. The 2008 asset turnovers are higher and ACP lower than 5-yr
average, indicating strong performance.
Information Technology
MANT

Peers

CSC

CAI

SRX

Total Asset Turnover

1.83

1.21

1.05

1.27

1.33

Fixed Asset Turnover

Accounts Receivable
Turnover

112.96

47.19

6.40

95.44

39.71

4.59

4.24

3.70

5.28

3.74

Working Capital Turnover

13.29

8.06

12.38

7.74

4.05

Average Collection Period

78.36

87.21

97.31

68.19

96.13

In the IT industry, ManTech is the leader in asset management. The TATO and fixed asset
turnover ratios are almost outside the range of comparison to the peer group; however CAI
would be the closest competitor for TATO and FATO, and exceeding MANT performance with
A/R turnover and ACP. CSC brings down the peer average for fixed, total, and A/R turnovers.
Aerospace & Defense
MANT

Peers

LMT

NOC

GD

Total Asset Turnover

Accounts Receivable
Turnover

1.83

1.14

1.28

1.12

1.03

4.59

7.71

7.06

7.61

8.45

Average Collection Period

78.36

46.97

50.98

47.31

42.62

Again, this industry is capital intensive yielding lower turnover ratios. For this reason, the fixed
asset turnover and working capital turnover ratios were substantially different form ManTechs
analysis therefore not creating meaningful data and were excluded from this portion of the asset
management analysis. In this industry ManTech is lags in the A/R Turnover and ACP, likely due
to a difference in the fundamental business operations and agreements with clients.
P a g e | 20

Debt Management Analysis

Historical Trends
2008

2007

2006

2005

2004

Accounts Payable Turnover

9.94

12.09

13.09

13.91

12.86

Days Sales in AP

36.20

29.78

27.49

22.09

23.53

Equity Multiplier

1.50

1.70

1.34

1.47

1.46

From a debt management standpoint, MANT decreased A/P turnover and increased Days Sales
in A/P, but staying within a moderate expected range, which can be seen as company strength.
ManTech decreased ACP in the above analysis and decreased A/P turnover in this analysis,
indicating they are receiving their cash sooner and paying their liabilities later, taking advantage
of the time value of money. The equity multiplier decreased from 2007 due to paying off all LTD,
however this metric indicating ManTechs financial leverage remained in a relative range of
recent history.

Information Technology
MANT

Peers

CSC

CAI

SRX

Accounts Payable Turnover

9.94

7.13

3.58

10.66

7.15

Days Sales in AP

36.20

61.55

100.55

33.76

50.33

Equity Multiplier

1.50

2.20

2.89

2.07

1.64

The competitors in the peer group far exceed MANT for debt management, indicating stronger
power in negotiating agreements to pay liabilities. This would be reflective of the difference in
seller power between MANT and the peer group. The higher equity multiplier of the peer group
is a function of the reliance on LTD in competitor capital structure, which also creates greater
financial risk among peer companies.

Aerospace & Defense

MANT

Peers

LMT

NOC

GD

Accounts Payable Turnover

9.94

4.90

5.80

5.26

3.63

Days Sales in AP

36.20

76.57

62.06

68.40

99.25

Equity Multiplier

1.50

5.68

11.67

2.53

2.82

Also in the Aerospace & Defense industry, ManTech underperforms in terms of debt
management. Given the higher cost of services and lower asset turnover ratios for the capital
business these peers operate in, higher Days Sales in A/P and lower A/P Turnover are to be
expected. Additionally, these companies rely on LTD in their capital structure creating higher
Equity Multipliers. Lockheed Martin is an outlier for EM, with nearly 4x as much LTD as direct
competitors.
P a g e | 21

Extended DuPont Model

Historical Trends
2008
2007
2006
2005
2004

Net Profit
Margin
4.83%
4.64%
4.46%
4.51%
2.99%

Total Asset
Turnover
1.83
1.54
1.85
1.76
1.77

Equity
Multiplier
1.50
1.70
1.34
1.47
1.46

Return on
Equity
13.27%
12.19%
11.05%
11.67%
7.71%

The Extended DuPont Model illustrates the company managements effectiveness. Three
factors contribute to effectiveness: Net Profit Margin, Total Asset Turnover, and Equity
Multiplier. The increase in 2008 ROE is due to Total Asset Turnover increase and Net Profit
Margin increase, which together create Return on Assets (ROA) in 2008. The Equity Multiplier
decreased by paying off LTD, but was more than offset by ROA. Given company history of100%
equity financing, we expect MANT to continue to grow NPM and TATO, while increasing TA and
therefore reasonably predict continued growth of ROE.

Information Technology

CSC

Net Profit
Margin
3.30%

Total Asset
Turnover
1.05

Equity
Multiplier
2.89

Return on
Equity
9.97%

CAI

3.44%

1.27

2.07

9.08%

SRX

4.86%

1.33

1.64

10.57%

IT Competitors have lower profit margins and asset turnovers across the board, yielding lower
Return on Equity. Financial leverage of peers is approximately 1.5x of ManTech; however is not
offset by Return on Assets. This indicates MANT is better positioned for sales growth with given
assets and even with lower financial leverage, achieve a higher rate of return on equity for
investors a strong industry performer.

Aerospace & Defense

LMT
NOC
GD

Net Profit
Margin
7.53%
-3.78%
8.39%

Total Asset
Turnover
1.28
1.12
1.03

Equity
Multiplier
11.67
2.53
2.82

Return on
Equity
112.29%
-10.75%
24.46%

For the other peer group comparison, the numbers are not meaningful, through still provided for
analysis. Northrop Grumman experienced a net loss in 2008 and therefore a negative ROE. The
higher profit margins of this industry, coupled with the higher financial leverage, dont allow for
valuable comparison with ManTech. The lower Total Asset Turnover partially offsets this
difference, however not significantly enough to warrant peer comparison.
P a g e | 22

Pro Forma Income Statement

Revenues
Cost of Sales
Gross Margin
General &
Administrative
EBITDA
Operating Income
Interest Income
Other, net
EBT
Less: Taxes
Income from
Operations
(Loss) disc comps
Gain on sale of disc ops
(Loss) from disc ops
Net Income
Basic EPS
Diluted EPS

2007

2008

2009E

2010E

2011E

2012E

2013E

1,448,098

1,870,879

2,132,802

2,346,082

2,580,690

2,838,760

3,122,635

1,214,150

1,565,198

1,784,326

1,962,758

2,159,034

2,374,938

2,612,431

233,948

305,681

348,476

383,324

421,656

463,822

510,204

120,244

152,323

173,648

191,013

210,114

231,126

254,238

127,404

170,258

191,350

207,045

223,677

243,934

266,701

113,704

153,358

174,828

192,311

211,542

232,696

255,966

(3,842)

(3,166)

(3,609)

(3,970)

(4,367)

(4,804)

(5,284)

263

(233)

(266)

(292)

(321)

(354)

(389)

110,125

149,959

170,953

188,049

206,853

227,539

250,293

(42,798)

(59,667)

(68,020)

(74,822)

(82,305)

(90,535)

(99,589)

67,327

90,292

102,933

113,226

124,549

137,004

150,704

(458)
338
(120)
67,207

90,292

1.89

2.54

102,933

113,226

124,549

137,004

150,704

2.90

3.19

3.51

3.86

4.25

2.88

3.17

3.49

3.83

4.22

Sales Growth
For the year 2009, we expect ManTech to grow revenues by 14%. We derived this growth rate
by taking the lower end of the companys expectations of $2.1 2.2 billion in revenue for 2009.
ManTechs management is predicting to grow between 12-18% for 2009 with 10-16% being
organic, and ValueLine expects MANT to grow at 14% next year.
While analysts expect MANT to grow at an average rate of 13% annually over the next five
years, we lowered these estimates 300 basis points to 10% to be conservative. Thus, for 2010
and after, we assume a growth rate of 10%. Given the opportunities in Iraq and Afghanistan and
developments in cyber security to grow revenues, MANT should have no problem meeting
analyst expectations. Our performance estimates compared against First Call estimates are
listed below.

P a g e | 23

2009
2010
2011
2012
CAGR

Revenue and Earnings Comparison

Earnings Per Share
Growth Rate
Forecast
Street
Forecast
Street
$
2.90
$
2.98
14%
13%
$
3.19
$
3.32
10%
13%
$
3.51
$
3.25
10%
13%
$
3.86
$
3.25
10%
13%
11%
13%

Cost of Sales and SG&A Expenses

Cost of Sales and SG&A expenses are pegged at 84% and 8% as a percentage of revenue, the
same as 2008. We feel that using 2008 historicals provides an accurate measure of future cost,
because it reflects the companys consistent ability to lower SG&A expenses over the last few
years as a portion of revenue. Cost of Sales has remained about the same over the last five
years, with minor fluctuations.

Interest Expense, Other Income, and Tax Rate

These projections provide an operating margin of 8.2%, slightly below company expectations of
8.3% going into 2009. Further we see no indication that the companys operating margin should
change much in the foreseeable future. Net Interest Expense and Other Income represent 2%
and .15% of EBIT, based on 2008 figures. We used the 2008 effective tax rate of 39.8% for our
projections, which is slightly above company guidance of 39.4%.

Income from Discontinued Operations

While in the past the company has discontinued and sold off components and operations, 2008
had no such activity and we felt that because those activities against earnings reflected strategic
decisions in the firm we decided not to make any assumptions to forecast them. These
expenses and revenues do not appear to have much material impact on the bottom line.

Earnings Per Share EPS

EPS calculated using diluted shares for a conservative estimate. The treasury stock method is
used to calculate effect of in-the-money options. The company has no convertible securities and
debentures.
Stock Options
Exercisable
Expected to Vest
Total, In-the-Money
Options

P a g e | 24

Shares
(000)
646
1184
1831

Cash Produced
Market Price
Buyback
Dilution Effect

64516
40
1600
231

Common A Shares
Common B Shares
Shares Outstanding

21541
13958
35500

Diluted Shares

35730

Exercise
Price
26.32
40.11

Pro Forma Balance Sheet

2007

2008

2009E

2010E

2011E

2012E

2013E

8,048

4,375

65,219

188,857

324,748

474,117

638,312

337,467

407,248

417,893

426,561

436,096

446,584

458,121

19,104

14,200

14,675

15,061

15,486

15,954

16,468

364,619

425,823

497,787

630,479

776,330

936,654

1,112,90
1

14,170

16,563

16,945

16,552

16,241

16,021

15,900

451,832

479,516

479,516

479,516

479,516

479,516

479,516

Employee Savings Plan

17,999

14,771

14,888

15,005

15,124

15,243

15,363

Intangible Assets

82,976

78,710

78,710

78,710

78,710

78,710

78,710

Other Assets

5,907

6,329

6,329

6,329

6,329

6,329

6,329

Total Assets

937,503

1,021,71
2

1,094,17
4

1,226,59
1

1,372,24
9

1,532,47
3

1,708,72
0

A/P

100,447

157,407

147,175

161,893

178,082

195,890

215,479

61,429

75,121

77,083

78,681

80,439

82,372

84,499

8,334

8,451

8,664

8,837

9,028

9,238

9,469

Current Liabilities

296,210

285,079

232,922

249,411

267,549

287,500

309,447

Accrued Retirement

18,973

15,930

18,160

19,976

21,974

24,171

26,588

Other LT Liabilities
Deferred Tax- NonCurrent

7,848

7,769

8,857

9,742

10,717

11,788

12,967

24,167

32,398

32,398

32,398

32,398

32,398

32,398

386,198

341,176

292,337

311,528

332,637

355,858

381,400

Common Stock Class A

205

218

218

218

218

218

218

Common Stock Class B

143

140

140

140

140

140

140

937,503

1,021,71
2

1,094,17
4

1,226,59
1

1,372,24
9

1,532,47
3

1,708,72
0

Cash
A/R
Prepaids
Current Assets
PPE
Goodwill

Accruals
Billings EXc Rev Earned

Total Liabilities

Total Liabilities and

Equity

Assets and Liabilities

Current asset and current liabilities were calculated as a percentage of revenue, excluding cash
and short term debt. The firm expects to pay off its remaining debt in the first two quarters of
2009. Intangible assets and goodwill were left constant because they are not driven by revenue,
but by strategic decisions of the firm. Deferred taxes were left constant as well, because they
are driven by accounting decisions and tax complications and are thus unpredictable. For
P a g e | 25

shareholders equity, we assume no change in common stock or treasury securities. Retained

earnings were calculated as net income for the current year plus retained earnings of prior year.

Property, Plant, & Equipment

Property Plant and Equipment was calculated as gross PPE less accumulated depreciation.
Accumulated depreciation for the current year is calculated as the accumulated balance in the
prior year plus the after tax depreciation expense in the current year.
Cash was used as the plug for the model. Under the equation Assets=Liabilities + Shareholder
Equity, the difference between the two sides of the balance sheet becomes the companys cash
position. Our balance sheet assumes no activity in acquisitions or share buybacks that would
likely occur. Acquisitions would likely increase goodwill and share buybacks would lower equity,
both which would reduce cash in the equation we used. However, the growing cash balance
suggests that the company is generating enough cash in earnings to remain healthy in the
future and to continue with its acquisition strategy.

Discounted Cash Flow

Free Cash
Flow

2005

2006

2007

2008

2009

2010

2011

2012

2013

51,410

50,701

67,207

90,292

102,933

113,226

124,549

137,004

150,704

5,512

6,257

8,708

10,430

16,522

14,734

12,135

11,237

10,735

1,449

963

2,349

1,906

3,609

3,970

4,367

4,804

5,284

Less: NWQ

28,522

(15,836)

61,100

(5,892)

17,524

14,269

15,696

17,266

18,993

Less: CapEx

7,103

7,405

4,834

7,792

4,970

4,047

4,452

4,897

5,386

FCFF

19849

64427

7632

96916

93352

105674

112168

121275

131776

0.56

1.81

0.21

2.73

2.63

2.98

3.16

3.42

3.71

1%

5%

1%

7%

7%

7%

8%

8%

9%

93,352

105,674

112,168

121,275

131,776
2,687,714

Net Income
Add: Dep &
Amor
Less: Int Exp

FCF per Share

FCF Yield
Cash Flows
NPV of CF's

2,133,302

Add: Cash

4375

Less: Debt

Intrinsic Value

2,137,677

Shares Outstanding

35,500

Value per Share

$ 60.22

Current Price

$ 40.32

Under/(Over)Valued

P a g e | 26

49%

Capital Expenditures
Capital Expenditures include purchases of property plant and equipment and investment in
capitalized software. For our forecast, both items were tied to an increase in revenue. Increase
in gross PPE is calculated as 1.25% of revenue. Investment in capitalized software is assumed
as .065% of the increase in sales revenue, based on 2008 historicals.

Depreciation
Depreciation was forecasted as a percentage of gross PPE. Specifically, we used the rate of
10.3%, which was depreciation/gross PPE for 2008. We feel that tying depreciation to gross
PPE would provide a more accurate forecast of depreciation than sales or net PPE because of
volatility in growth as well as accumulated depreciation. Gross PPE was forecasted as well to
determine depreciation and is calculated as 1.25% of the increase in revenue, based on 2008
levels and is similar to the three year average. The firm also has considerable non-cash
amortization expenses from goodwill. Because goodwill occurs from acquisitions, which are a
function of the firms long term strategic decisions, we decided to keep goodwill constant and let
the firms amortization expenses zero out. Our forecasted amortization expense comes from the
firms amortization schedule presented in the 10-K and no new acquisitions.

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Investment in Net Working Capital

Investment in Net Working Capital was forecasted as a 6.7% of the increase in sales. Over the
last five years, the NWC as a percent of incremental revenue has ranged from -10% to 20%.
Because of this volatility, we averaged the last four years to derive 6.7% of incremental
revenue. Interest expense is explained in the Pro Forma. Cash and Current Portion of Long
Term Debt were excluded from working capital as recommended by John Stowe, because
holding cash does not generate a use or a source of cash and short term debt relates to the
firms financing activities, not its operating activities.

Weighted Average Cost of Capital [WACC]

The risk free rate was calculated as the average rate of return the 10 year treasury bills from
1999 to 2009, which was 4.75%.11The historical average return of the market is 10.75%. The
firms beta is .55 according to Capital IQ. The difference between the return of the market and
the risk free rate is 6% after beta is applied. The resulting cost of equity is 8.05%. Because the
firm has no debt or preferred stock, the cost of equity is representative of the weighted average
cost of capital.
WACC = (Cost of Equity)*(Weight of Equity) + (Cost of debt)*(Weight of Debt)
We utilized the Capital Asset Pricing Model to determine the cost of equity.
Ke=rf + B (rm-rf)

11

Federal Reserve Bank

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DCF Sensitivity Analysis

We also conducted a sensitivity analysis to give insight on possible valuations given changes in
WACC or LT growth. Below are the terminal values, present values, and values per share given
the changes. Currently, the 15% Margin of Safety requires our valuation to be above $46.26.
This margin is eclipsed in each combination of WACC and LT growth, except when growth slips
below 4% with a 9.05% WACC, and to 2% with an 8.55% WACC. However, our forecasts, as
well as other analysts, show that these growth-WACC combinations are unlikely. The sensitivity
analysis shows ManTech is currently undervalued.

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Economic Value Added [EVA]

Over the last four years, ManTech International has grown both its economic value added, as
well as its market value added. EVA is a measure of value that is created from the capital
contribution of shareholders and bondholders. A positive EVA indicates creating value.
EVA=((NOPAT/K)-C)K ,
Where C is the cost of capital and K is the capital invested. Capital invested is the book value of
shareholders equity + current and LT debt Non-operating cash and marketable securities.
MANT has created value over the last few years and EVA grew substantially from 2007 to 2008.
Market Value Added is a measure of the difference between the firms market value and its
adjusted book value. To calculate MVA, we used the year end market price and shares
outstanding to determine the market value of the firm.
MVA=Market Value Capital Invested.
MANT has grown its MVA substantially from 2005 to 2008. However, because ManTechs share
price has depreciated, MVA will be slightly lower, but still exceeding 2007.
Economic Value Added

2005

2006

2007

2008

Operating Income

60,412

55,596

67,327

90,292

Contributed Capital

415,454

417,506

708,257

720,261

WACC

8.05%

8.05%

8.05%

8.05%

EVA

29,935

18,645

22,947

35,509

Market Value, 12/31

989,030

1,307,465

1,527,210

1,923,745

Shareholder Value

415,454

417,506

708,257

720,261

MVA

573,576

889,959

818,953

1,203,484

Market Value Added

H-Model DCF Valuation

We conducted a three-stage H-model valuation for ManTech using FCFF as the shareholder
payout. Stage 1 assumes that the FCFF stream will grow at a short-term rate for four years.
Stage 2 assumes the short-term rate will decline in a linear fashion from the short-term growth
rate to the long-term growth rate over a six year period. The final stage represents long-term
growth in perpetuity, which will likely resemble that of the overall economy. The variables of this
three stage model are (thousands USD$):

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D0= FCFF 2008 (as shown on the pro forma Income Statement) = $96,916.
r = WACC = 8.05% as calculated by the CAPM (ManTech has no LTD). 8.05%
WACC is used to discount the future cash flows back to the present.

During stage 1, FCFF will grown by gs = 6% for 4 years. This growth rate is the
average pro forma growth rate in FCFF over the next 4 years.
During stage 2, FCFF growth will decline over a six from gs = 6% to gL = 3%.
During stage 3, FCFF growth will remain at the equilibrium rate of 3%, which
resembles GDP growth.

With short-term growth of 6% lasting four years, a declining growth stage of 6 years, and a longterm equilibrium growth rate of 3%, our 3 stage H-model valuation gives an intrinsic value of
$66.61. This gives a 39.47% upside on the current market price of $40.32.
(t)

Vt

Value Vt / Dt

D1

112,057.90

2
3

D2

118,781.37

D3

125,908.26

D4

133,462.75

4 + perpetuity

V4

2,717,786.95

Derivation of Vt

PV of Vt @ 0.0805%

96,916(1.06)

$103,279.17

96,916(1.06)

100,899.47

96,916(1.06)

98,574.59

96,916(1.06)

96,303.29

Total PV of CF

PV of FCFF
Cash
D0

96,916

LT Debt

r
gs

0.0805
0.06

gL

0.03

PV Equity
Shares Out.
(35.5M)
Target Price
Current Price
Upside
Potential

1,961,085.17
$2,360,141.69

$2,360,141.69
$4,375
$0
$2,364,516
35,500
$66.61
$40.32
39.47%

Investment Summary

Recommendation: Purchase 1100 shares of MANT.

Trading at a large discount to intrinsic value, according to numerous valuation
models.
Strong Balance Sheet: No LT Debt.
10-16% organic growth for near future.
Strong Management Team
Engaged in Mission Critical Activities. The business model is immune to budget
cuts.

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Income Statement12

12

ManTech 2008 10-K

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Balance Sheet

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Statement of Cash Flows

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