A Happy Birthday For The Forbes Beltway Index

A year ago this week, Forbes.com debuted the Forbes Beltway Index, our means of tracking the stock market fortunes of just over 100 public companies that either do significant business with the federal government or benefit from federal law.

One rationale for the index is that a solid business rapport with Uncle Sam is a positive indicator for investors. Federal statutes, for example, occasionally shield companies from competition. And big contractors can depend on a steady flow of government dollars when the private-sector business cycle turns down.

So far, the Forbes Beltway Index hasn’t disappointed us. On a 52-week basis, through Monday’s market close, the index has gained 14%, three points ahead of the Standard & Poor’s 500.

We’re not claiming here that an investor hitching a ride on the Beltway Index would have necessarily enjoyed that 14% increase. Unlike the Dow Jones industrials or the S&P 500, there are no mutual or exchange-traded funds tracking it. Trading expenses would have taken a bite out of performance.

Note also that in the course of the year, we made a few changes to the Beltway Index roster to keep it up to date with the latest federal contracting information and movement among the defense companies appearing on our own Forbes lists.

Still, here’s a look back at the first year’s winners and losers. In the former category, a notable is Horizon Lines, the Charlotte, N.C.-headquartered shipping concern. As the company acknowledges in its filings, a key to Horizon’s business is the Jones Act. That protectionist federal law requires that vessels transporting cargo between certain ports be built in the United States, be manned by predominately U.S. crews and be owned by U.S. businesses.

Full story at Forbes.com

A Gold Star for this Growth Stock

These are heady days for Blackboard, the developer of educational software. Earlier this year, the company posted $183 million in 2006 sales, a 35% year-over-year jump. Several hundred of its 800 employees will soon move to a roomier headquarters, a downtown Washington, D.C. building being vacated by the Department of Justice.

Chief executive Michael Chasen, who at age 25 left law school to found the company in 1997, says he’s still keeping entrepreneurs’ hours.

“You’d think that with 800 people, there’d be less for me to do,” he quips. “I was up until two o’clock last night.”

Wall Street has shared in the excitement. Blackboard’s stock, up 11% year-to-date, has more than doubled since debuting in 2004. It now goes for a frothy 86 times its consensus earnings forecast for 2007.

If you’re a growth-oriented investor, there’s an argument to jump on the bandwagon. On average, analysts expect Blackboard to increase earnings at a 25% annualized rate over the next three to five years. And while the stock is richly valued, some measures don’t look outrageous. Its price-to-sales multiple of 5.0, for example, stands under an industry aggregate of 5.3 for U.S. software stocks. Salesforce.com goes for 10 times its revenues. Google’s sales multiple? 14.

Full story at Forbes.com

Network Stocks: A View From Washington

For investors with a Washington focus, the business of networks and network gear ought to be an area of interest. Even with budget outlooks getting cloudier, civilian, intelligence and military agencies face unrelenting pressure to improve and secure the way they communicate with data, video and voice.

“A lot of the routed networks out there are kind of long in the tooth,” says Robert Stevens, a vice president at Juniper Networks and the head of its federal government business. “It’s time to upgrade.”

In terms of placing your bets, two competitors stand out here: Juniper and Cisco Systems. Which stock looks more attractive now? The metrics give mixed signals.

In the realm of price-to-earnings ratios, the advantage goes to Cisco. Based on consensus earnings forecasts for the next two fiscal years, Cisco’s P/E multiples are 20 and 17, respectively. Juniper now carries equivalent multiples of 23 and 19.

But Juniper looks cheaper by other measures. Its price-to-book ratio now stands at 1.7, versus 6.0 at Cisco. The stock also looks relatively less expensive according to the price-to-sales, price-to-cash flow (in the sense of net income plus depreciation) and enterprise multiples. The latter is defined as enterprise value (market value plus net debt) divided by earnings before interest, taxes, depreciation and amortization. Juniper’s enterprise multiple is just 4.9, versus 14.1 for Cisco.

Given the split decision in the numbers, the investment decision may boil down to a simple choice: incumbent or insurgent?

Full story at Forbes.com

Political Risk Watch: Hotels

WASHINGTON – Economically, the U.S. lodging business has nice momentum. The industry sold a billion room-nights last year, which meant $134 billion in revenues. Investors have been enthusiastic too–hotel and cruise stocks in the Standard & Poor’s 500 are up 14% in the past year, six points ahead of the broader market.

Yet could politics prove a problem? The industry’s standard bearers in Washington admit a mixed forecast, given the new policy priorities on Capitol Hill.

“Many of them are good for our industry,” says Joseph A. McInerney, chief executive of the American Hotel & Lodging Association (AHLA). “Some of them are not that great.”

Full story at Forbes.com

Beltway Bet: Ceradyne

WASHINGTON, D.C. – On Thursday, Arlington, Va., investment bank Friedman Billings Ramsey held its annual Washington conference. At the event, execs at some of the biggest names in the defense business–Lockheed Martin, Northrop Grumman, among others–made their case to investors.

Early in his presentation, Ceradyne Vice President Marc King distinguished his employer from the pack. “The majority of what we do today is related to defense,” he said, “however, I want to be perfectly clear, we do not categorize ourselves as a defense company.”

Not a defense company, eh? No, that wouldn’t be perfectly clear to the casual observer of Ceradyne’s business. The Costa Mesa, Calif., company makes high-end ceramics from synthetic materials (as opposed to traditional ceramics, fired from non-metallic minerals like clay). In 2006, nearly three-quarters of Ceradyne’s $663 million revenues came from sales of ceramic body armor to defense customers.

Full story at Forbes.com

Stock Focus: Betting The Farm

WASHINGTON – Activity on farm policy is buzzing in Washington, as the big 2002 law on American agriculture nears its September expiration and needs renewing.

In January, the Bush administration unveiled its proposal for the so-called “farm bill,” and the appropriate congressional committees have also been busy. Wednesday, for example, a House Agriculture subcommittee took up the topic of organic farming in the Bush package. Gigantic pieces of legislation like this usually have implications for stock investors. Take the reauthorization of the 2005 law on highway and transit spending, which stirred up interest in publicly held heavy equipment, engineering and construction materials companies.

Full story at Forbes.com

Beltway Bet: FuelCell Energy

WASHINGTON, D.C. -Seven years ago, with California sweating through rolling electricity blackouts, the stock market worked up an appetite for outfits selling new ways of generating power. Shares of FuelCell Energy, a company in that business, spiked to a split-adjusted $54. Their recent price? $7, down 52% from a 52-week high.
Matters of energy and environment have hardly dropped out of the headlines, but the market’s enthusiasm for eco-stocks tends these days more to biofuels and solar power. SunPower, in the latter business, trades just 5% off a 52-week high of $48 and at a relatively rich 13 times its revenues.
For investors looking at long-term energy plays, don’t rule out FuelCell Energy. The federal government certainly hasn’t.

Full story at Forbes.com

Stock Focus: Defense Biz Overvalued?

WASHINGTON, D.C – With President Bush’s fiscal year 2008 budget submitted this morning, our tally of proposed spending on defense and national security for fiscal 2007 through 2009 comes to $793 billion
You can decide whether that big number is reasonable or not. We will note, however, that stocks of the biggest aerospace and defense contractors do not look modestly priced. Full story at Forbes.com

Beltway Bet: MTC Technologies

WASHINGTON, D.C. – Most of the companies on our 2007 Fast Tech list probably wouldn’t tempt a value-minded contrarian. One of the few exceptions is MTC Technologies, a government technology contractor.
Pick your metric. MTC Technologies is now valued under its $402 million in trailing-12-month sales. Its price-to-earnings ratio, based on consensus forecasts for the coming 12 months, is 17, versus an average of 34 for the Fast Tech 25. Among 20 publicly held companies that specialize in providing tech services to the government, the average price-to-book ratio is 3.3. MTC’s book value multiple? 1.9.

Full story at Forbes.com

VC Builds Inside The Beltway

WASHINGTON, D.C. – Two years ago, venture capitalist Hans Kobler and his partners at Digital Power Capital persuaded several smaller-portfolio companies to merge into a Washington-headquartered entity, ICx Technologies, focused on the detection and surveillance markets.
How’s that decision working out? “Terrific,” says Kobler, 41, ICx Technologies’ chief executive officer.

We doubt he’d tell us otherwise. Still, for entrepreneurs and venture investors interested in the homeland security market, ICx Technologies’ approach bears observation.

Full story at Forbes.com