DynCorp also has quite a bit of debt left over from its private equity days and is dependent on a relatively small number of customers for the bulk of its income. And on the surface, the financials aren't all that hot, as the company earned just $3.9 million on $2.1 billion in sales over the past 12 months, posting a net profit margin of just 0.2%.
Yet if you look past 2007 results that were undercut by cost overruns on two projects and severance payments to a couple of ousted executives, you are now looking at a company with a large backlog that is likely to grow by at least 15% next year with margins of nearly 9%. With another couple of big contracts in the wings and a new CEO gaining the Street's confidence, I believe the business is fundamentally sound and the stock is cheap.
Considering that DynCorp will absolutely continue to benefit from the military outsourcing trend and win contracts that leverage its rock-solid back office, it's not hard to imagine that it will earn as much as $2 a share in 2010. Put a reasonable multiple of 16 times earnings on that, and you've got the prospects of a $32 stock in 24 months, or a double from here.