Proposed FY12 Budget: Flat to Slightly Up Seems Better than Sentiment

The Office of Management and Budget released the U.S. President Barack Obama's preliminary fiscal 2012 budget on Monday included some details on spending for all departments and for various functions, including IT and Department of Defense (DoD) operations and maintenance.

Jefferies & Co. said the President's proposed fiscal 2012 budget, announced on Monday should provide a modest boost to quite poor investor sentiment around government technology spend.

Modestly-up fiscal 2012 tech and Department of Defense operation and maintenance budgets point to a steady macro demand environment for federal IT. Fast current markets should exist for cyber and data center consolidation, said Joseph Vafi, an analyst at Jefferies.

Joseph Vafi feels that low double-digit gains in the overall federal IT budget (up about 1.3 percent to $79.5 billion) and the overall DoD base discretionary budget (up.0.7 percent to $553 billion) are net positives for federal IT players, where sentiment continues to imply deteriorating budget environment.

While all eyes tend to focus on the overall DoD and IT budgets, perhaps the largest single line item of spend which matters for federal IT is the DoD's operations and maintenance budget. At a proposed $204 billion, the operations and maintenance budget is about 5 times larger than the DoD's IT budget, Jefferies said in a note to clients.

The overall operations and maintenance budget is slated to be up 11 percent for fiscal 2012 versus fiscal 2010. Funds to keep technical equipment in operation, a major line of service for many federal IT companies, come from the operations and maintenance budget.

Initiatives to protect critical IT infrastructure across federal, state, and local governments remain one of the key focus areas for IT spending. The President's fiscal 2012 budget proposal requests about $25 billion of infrastructure protection initiatives, including cyber security funding government-wide, allocated primarily to DoD and Department of Homeland Security (DHS).

Recent results out of federal IT players has been mixed but Joseph Vafi feels ManTech International Corp. (MANT) EPS should be more like CACI International Inc. (CACI) this quarter. While CACI reported a very strong quarter, most recently both Computer Sciences Corp. (CSC) and SAIC, Inc. (SAI) have had weaker financial performances from their federal businesses.

We feel that ManTech shares could provide the best risk/reward among federal IT names yet to report this earnings season. As mid sized, more focused service providers, both ManTech and CACI seem to have service portfolios which have remained in the higher priority areas of spend recently. Importantly, ManTech likely has the highest exposure to pure cyber work among federal IT players, somewhere in the mid teens on a percentage basis, said Joseph Vafi.