IT providers to Pentagon to gain from cyberpush

BANGALORE , INDIA: A review of U.S. cybersecurity efforts ordered by President Barack Obama, aimed at protecting vital computer networks from attacks, could prove a boon to several federal IT services contractors.

Information technology industry executives and analysts say the cybersecurity market will be a fast-growing area in coming years and could generate more than $10 billion in contracts by 2013.

"Cybersecurity is a big push," said Jesup & Lamont Securities analyst Alex Hamilton. "I think that's going to be the main area going forward."

Federal IT contractors such as ManTech International Corp, CACI International Inc, NCI Inc and Science Applications International Corp stand to gain from an increased emphasis on cybersecurity in defense spending.

The companies provide a variety of services to U.S. defense forces and intelligence agencies, including setting up surveillance systems, law enforcement training, and support and restoration of army equipment for future use.

A two-day "cyberwar" simulation conducted in December found the United States unprepared for a major hostile attack against its computer networks, government and industry officials said.

The war game simulated a dramatic surge in computer attacks at a time of economic vulnerability, and required participants to find ways to mitigate the attacks.

In its third-quarter earnings, ManTech International, a market leader in cybersecurity work, said its backlog driven from contract awards was $4.26 billion, as of Sept. 30, 2008, up 21 percent from its year-ago levels.

The company, which is behind the telecommunications backbone in Iraq and Afghanistan, had a funded backlog of $1.21 billion, up 43 percent from year-ago levels. About 95 percent of ManTech's business comes from the U.S. Defense Department.

"Backlogs amongst defense IT coverage universe are at or near records, speaking to the relative importance of the services they provide," Jesup & Lamont's Hamilton said.

NCI, another big player in the cybersecurity space, topped Wall Street's profit view in the last two quarters.

About 80 percent of the company's revenue comes from the Defense Department and federal intelligence agencies.

"In the coming years, if there is pressure on the defense budget, it is likely to be on major platform companies -- the makers of aircraft, ships, etc.," said Philip Finnegan, the corporate analysis director at defense research firm Teal Group.

Room to Grow

"We expect growth to accelerate in 2009 over 2008 levels for most defense IT services firms," Pacific Crest's Erik Olbeter noted.

The Pentagon's fiscal 2009 core budget saw a 7.5 percent increase in defense spending over 2008 levels to $515 billion.

Most analysts say shares of defense IT firms will continue to outperform the broader market as the spending environment in 2009 remains robust.

NCI shares gained more than 85 percent over the past year. Shares of ManTech International rose about 30 percent, outperforming the Dow Jones industrial average, which fell almost 35 percent.

"There is more room for these stocks to grow," Jesup & Lamont's Hamilton said.

Hamilton's top pick in the sector is Science Applications International, replacing last year's NCI. Science Applications shares gained more than 10 percent over the past year.

"This change is only a reflection of how well NCI did last year and is not a reflection on the fundamentals of the company," he added.