shapecharge
Investment Thesis
ICF International (NASDAQ:ICFI) is a consulting and technology services company headquartered in Reston, Virginia that focuses on providing services such as management, strategic planning, and analytics for governments as well as some commercial partners. The majority of the company’s revenue is derived from local, state, and federal agencies of the US government. Their work consists of contracts for digital modernization services, disaster management, technological support services, IT infrastructure, and analytic services to large projects and departments/agencies, such as the Department of Defense, Department of Health and Human Services, and energy and utility providers.
This company is in an industry and sector away from most other tech and IT companies, as ICF serves mainly the US government, which never seems to run out of money or appetite, no matter the economic condition. US federal government spending, which had never before hit $5 trillion, hit $7 trillion during the COVID-19 pandemic in 2020 and has since never fallen below $6 trillion, and is not expected to. As long as the federal government continues to set this precedent of poor fiscal responsibility, companies like ICF International will continue to benefit from increased revenues. The war in Ukraine, and the Israel-Palestine conflict, serve to only further government spending and increase the opportunities for companies like ICF to grow into new areas.
A valuation of ICF International relative to its peers is tricky, as they are in a very niche area of the economy. On Seeking Alpha, they are listed in the Industrials sector, however a better valuation would be to compare to some of its direct niche competitors, such as Leidos (NASDAQ:LDOS) and Booz Allen Hamilton (NASDAQ:BAH). Compared to these competitors, ICF’s looks fairly valued at its current earnings, with none of its metrics jumping off the page. The company’s P/E ratio, 20.77x, is nothing special and about the average between LDOS and BAH. While no metrics look overly flashy, that’s part of the genius in the business of ICF. They aren’t flashy, they don’t grow like a tech giant, but they also don’t fall like tech giants. ICF is a tech and consulting company with the stability of a chemical or materials company, which is a rare find indeed. A steady income with a reliable customer base, ample room to grow, and only a few direct competitors, ICF looks like a stock that I would be willing to add to my portfolio at its current price.
Revenues
ICF has been steadily increasing their revenues over the past years, with Q3 of 2023 showing a 7.21% increase YOY. Revenues have been increasing every quarter for the past 5 quarters and are expected to continue to grow. Bear in mind, this growth isn’t huge, but it is steady and paced. In their most recent earnings report, Q3 of 2023, we see that US governments accounted for 70.9% of their quarterly income.
Revenue from the federal government increased 2.8% YOY, and revenues from state and local governments increased by 17.7% YOY. These stem from a wave of new contracts in services such as digital modernization and disaster management. For example, ICF won multiple large contracts in the past few months with the US Forest Service, Department of Homeland Security, National Health Institute, and Department of the Interior for digital modernization services. These aging government technologies are being overhauled as the public sector attempts to drag itself into the information age.
Multiple smaller but growing sectors that are set for expansions for ICF are the US energy and environmental sectors, which are seeing an increased need for IT infrastructure to support clean energy initiatives as well as analytics for efficiency metrics, projections, and compliance checks. Disaster management services are also seeing growth with contracts from Puerto Rico and the state of Oregon to support recovery efforts, with hurricanes and wildfires ravaging those territories and others respectively.
Some of the most promising fields for ICF are international governments and the commercial sector. In Q3 of 2023, revenues from international governments increased 19.9% YOY, and although they still only account for roughly 5.5% of total revenues, the diversification into non-US government entities is a good play and seems to be yielding promising results. For example, in November ICF won a £5M contract with the United Kingdom Foreign Commonwealth and Development Office to provide support for the UK’s PACT (Partnering for Accelerated Climate Transitions) project. Niche IT and technological support needs like this have been a mainstay for ICF in American markets but are now starting to spread abroad. The commercial sector is also yielding promising results, increasing 9.9% YOY from Q3, and accounted for 23.6% of total revenues. 76.5% of these revenues came from the energy market, with many energy providers contracting ICF for support on grid modernization and energy efficiency and utilization insights. As the initiative to improve US infrastructure continues through the $1.6 trillion Infrastructure Investment and Jobs Act, modernizing our electrical grids, integrating clean energy, and maximizing energy efficiency are services in demand and these revenues are expected to continue to show strong growth. ICF’s commitment to this is shown by their purchase of grid modernization company CMY Solutions in August of this year.
Valuation & Financials
Wrapping up my analysis of ICF, I want to again take a look into their valuation and financials. Their books leave a little left to be desired, with only around $5.1 million in cash on its books and over $750 million in debt. However, they do have almost $430 million in accounts receivable and fairly low interest debt. What stands out for ICF is its goodwill (intangible asset) value of over $1.2 billion. This shows the reputation and the strong established customer base of ICF; not just anybody wins government contracts from the US government. The moat that surrounds the niche industry that ICF operates in is fairly wide because of this fact. ICF has connections, history, and strong ties with the US government, and would be a hard company to displace. The company’s price-to-sales ratio (P/S) of 1.27x is impressive and shows that the revenue is there, but its profitability that could be improved. Even that being said, EPS has grown almost 25% YOY in Q3, with their Net Income Margin Percent on Revenue increasing over 14% YOY. Their profitability is getting better, and along with their revenues increasing, that’s all you can really ask from a growing company.
Trading View
Here is the price action of ICFI over the past year, showing an upward trend from $100 to $135. We see it multiple times hitting a high, taking a break, and then testing that high again, usually breaking it. This is because of the positive momentum behind ICFI that is forcing the stock to continue to test old highs. That being said, we do see support here, as shown in green, at around the $118-$120 range, plateauing there twice before going on to get new highs both times. Therefore, we can assume that the market values this stock at least $120. I think ICFI will test that $145 high (shown in blue) next, with that continued upward momentum possibly taking it into the $150s and beyond by year-end if it breaks $145. If enough of the market thinks the stock is overvalued, then we should see ICFI fail to break that $145 high and plateau for longer, possibly falling down to that support at $120.
Risks
Now, as with all investments, there are still risks involved. The largest risk that faces ICF are budget cuts to government programs and agencies. Right now, agencies have enough money to afford this digital modernization and IT infrastructure services. We have seen the Republican Party force government shutdowns due to disagreements on the ever-expanding budget, so cuts are a high priority and have been in talks for a long time. However, even if these budget cuts come to pass, technology and consulting is still a necessary part of a lot of the government’s most well funded programs/agencies that rarely face budget cuts, such as the DoD or the Department of Homeland Security. ICF’s environmental sector could be expected to take more of a hit, which is why I like to see IFC diversifying their revenues with steady international and commercial deals.
The only other risk that I could see posing a threat is a rise in the cost of revenues and a loss in the already relatively slim profit margins. The cost of revenues rose 5.27% percent YOY in Q3 of 2023. However, as I explained before, their margins still rose on a whole and seems to be trending in the right direction with increasing EPS and Net Income Margin Percent on Revenue.
Conclusion
Overall, I would say ICF International, with strong and growing revenues, growing profitability, and reliable and consistently overspending customer base, would be a nice addition to a more risk-averse or slower growth portfolios. Don’t expect the growth of a Tesla (TSLA) or an Apple (AAPL), but depend on ICF during times in which Tesla and Apple face the waxes and wanes of consumer spending.
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