DLH Holdings Corp. (DLHC) serves the of an alphabet soup of federal agencies: DOD, CDC, NIH, DHA, DVA, ACF, and DHS, notes Doug Gerlach, editor of SmallCap Informer.

Many of its contracts address health and social services provided to veterans and active military members, but the company has expanded to provide health-related services to government agencies that support civilians. It provides monitoring and evaluation, electronic medical records migration, data collection and management, and nutritional and social health assessments.

DLH’s public health and life sciences services manage clinical trials and epidemiology studies, and support programs to advance disease prevention. DLH is skilled at reaching underserved and at-risk communities with strategic communication campaigns, research on emerging trends, health informatics analyses, and best practices applications.

In 2022, the company received full FedRAMP authorization for its Infinibyte Cloud solution. This designation means that DLH is accredited to provide highly secure IT solutions to Federal clients. DLH is headquartered in Atlanta, Georgia and has more 2,400 employees in 30 locations in the U.S. and overseas.

Growth pathways include acquisitions, health surveillance and pandemic prevention as Covid clinical trial work wraps up, shifting focus to match Federal spending priorities, and strong relationships with Federal agencies.

Headwinds revolve around the uncertainty of winning new government contracts and renewals. With that in mind, we conservatively project annual revenue and EPS growth at 12% through fiscal 2026, below analysts’ estimates of 15.0% long-term EPS growth.

Pre-tax profit margins since 2015 have been trending up in a range of between 4.7% and 5.8%, with an outlier in 2016. Overall inflation and higher costs to attract and retain workforce could pressure margins, especially in the near future, but management points to its employee turnover rates that are much lower than many of its peers.

Return on equity has averaged 14.3% in the last five years. The company’s debt load shrank by a third in 2021, demonstrating the company’s cautious use of borrowing to fund acquisitions when opportunities arise.

In the trailing four quarters as of June 30, 2022, the company grew EPS by 154% and revenues by 69%. With an estimated high P/E of 18 and EPS of $2.82, a future high price of $50.80 is possible. On the downside, if the stock falls to a P/E of 6 and EPS stall at the trailing 12-month level of $1.60, our estimated low price is $9.60.

This results in a potential total annual return of 32.8% and an upside/downside ratio of 14.3-to-1. In our view, the long-term outlook for DLH remains quite positive in any economic climate, which equates to a massive mis-pricing and good opportunity for investors.

Subscribe to SmallCap Informer here…