DLH Holdings Corp. (DLHC) serves the very critical needs of America’s armed services veterans though an array of federal government contracts, explains Doug Gerlach, editor of SmallCap Informer.

Its services support the health and social services that various agencies provide to veterans and active military members, and the company has expanded to provide health-related services to government agencies that support civilians.

The company’s technology-enabled solutions address case management, physical and behavioral health examinations, and medical administration services. It also provides a range of human services and solutions, such as monitoring and evaluation, electronic medical records migration, data collection and management, and nutritional and social health assessments.

On the IT side, DLH offers IT system architecture design, migration planning, and ongoing maintenance services. DLH’s public health and life sciences services include managing clinical trials and epidemiology studies, and working on programs that advance disease prevention.

DLH is skilled at reaching underserved and at-risk communities through strategic communication campaigns, research on emerging trends, health informatics analyses, and application of best practices. Key customers include an alphabet soup of federal agencies: CDC, NIH, DHA, DVA, ACF, as well as the Department of Homeland Security.

The company was formerly known as TeamStaff and was incorporated in 1969. The company changed its name to DLH Holdings Corp. in June 2012 and is headquartered in Atlanta, Georgia. DLH has more 2,200 employees serving numerous government agencies from 30 locations in the U.S. and overseas.

DLH’s markets often offer ripe conditions for technological improvements that streamline efficiency and cut through bureaucratic roadblocks.  The scale of the operations it serves for the federal government can be a barrier to entry for competitors, and its long-term relationships and ongoing long-term contracts provide a stable base for continuing revenues. Acquisitions have boosted results and created a platform for future growth.

In the last decade, revenues have grown at a very consistent annualized rate of 19.6%, reaching $209.2 million in fiscal 2020. Earnings per share have been less stable, but have grown in excess of 25% a year on average since 2017, though down from peak EPS in 2014 and 2015 when the company was roughly two-thirds smaller by revenues than it is presently.

In the third quarter ended June 30, 2021, revenue increased to $61.6 million in fiscal 2021 from $51.5 million in fiscal 2020, a gain of 19.6%, The company’s acquisition of Irving Burton Associates contributed approximately $7.3 million in revenue to results. EPS were up 31.3% to $0.21 from $0.16, and Operating margins rose to 8.0% from 7.4% in the prior-year period

Current initiatives and contracts are expected to drive revenues and EPS considerably higher in the next two fiscal years. We are projecting revenue growth of 15% and EPS growth of 18% on average through fiscal 2025. Pre-tax profit margins since 2015 have mostly been in a tight range of between 4.7% and 5.0%, with two years we consider outliers in 2016 and 2018. Return on equity has averaged 14.8% in the last five years.

The company’s debt load is currently at a high level, but the company is a cautious user of borrowing to fund acquisitions when opportunities arise. For the fiscal year to date, DLH has generated $15.4 million in operating cash, and paid down $16.2 million of its secured loan facility, satisfying mandatory principal amortization on its loan facility until March 31, 2023.

The company anticipates strong operating cash flow for the remainder of the fiscal year and intends to continue using cash to make debt prepayments when possible. As of June 30, 2021, the company had cash and cash equivalents of $0.7 million and debt outstanding of $53.8 million.

With an estimated high P/E of 26.5 and EPS of $1.44, a future high price of $38 results. On the downside, if the stock falls to a P/E of 14.4 and EPS stall at the trailing 12-month level of $0.63, a low price of $9 is our floor. This results in a potential total annual return of 22.0% and an upside/downside ratio of 4.8-to-1.

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