As society has learned over the past few years, having technology-enabled solutions and information sources for all facets of work and life is of paramount importance. Government agencies especially need to have accurate and timely information to make decisions from and disseminate to the public. Companies that serve government agencies as their primary customer base can often be overlooked as they operate in a very specific niche, but can be worth exploring for investors.
One such company is DLH Holdings Corp. (NASDAQ: DLHC) which provides products and services such as business process outsourcing, program management, public health research and analytics, logistics, healthcare solutions, and other services primarily to Federal agencies. The company’s customers include agencies such as the Department of Defense, Department of Health & Human Services, Department of Veterans Affairs, National Institute of Health, and the Centers for Medicare and Medicaid Services. Atlanta, Georgia-based DLH was known as TeamStaff up until 2012 but has been in business since 1969.
A stable customer base with deep pockets is important for any business, and there are no deeper pockets than those of the Federal government. Long-term projects such as clinical trials and epidemiology studies help keep revenue steady and make it difficult to switch providers midstream, which benefits DLH.
The company is still quite small with only a $195 million market cap but has been experiencing rapid growth. DLH has grown sales by 58.8% over the past year and earnings by 112.7% for the same period. Over the past five years, the company has averaged 29.1% revenue growth and 28% earnings growth. These averages have outpaced the S&P 500 as a whole, which has averaged sales growth of 27.3% and 14.5% over one and five years respectively. On the earnings side, the S&P 500 has averaged one-year growth of 74.5% and five-year growth of 27.3%.
DLH also appears undervalued compared to the market as a whole, especially for a company that is growing quickly. The company has a price-to-earnings (P/E) ratio of 13.1 and an EV/EBITDA of 7.8, which compares favorably to the S&P 500 P/E of 22.1 and EV/EBITDA of 18.2. If the company can sustain its recent growth rates eventually investors should take notice and reward DLH with multiple expansions to bring it closer in line with the broader market.
For all the things the Federal government does, it is not traditionally known for efficiency, so partnering with businesses that can help streamline processes and provide valuable technology services can be a good use of taxpayer funding. DLH Holdings provides a broad suite of value-added services to several large government agencies and many of its core competencies have grown in importance over the past few years and should remain an area of focus going forward. This small and growing company could be a solid addition to investors’ portfolio and provide diversification from other stocks that are primarily geared toward the consumer or B2B markets.
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