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Strong Earnings Boost Shares

This model portfolio name reports fourth-quarter numbers that easily topped analyst estimates.
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Shares of DynCorp (DCP) were recently trading 13% higher at $16.50 after reporting strong earnings, and we wanted to update readers. We aren't taking any action in this Alert.

For its fiscal fourth quarter, DynCorp reported earnings per share of 34 cents on revenue of $812.8 million. The results easily topped analysts' estimates, which had called for earnings of 30 cents per share on revenue of $772.8 million. Management said during its conference call that the increase in revenue resulted from growth across all three business segments, and also noted that days sales outstanding (DSO) fell to 60 days, from 73 days.

DynCorp said it expects earnings per share of $1.42 to $1.54 for fiscal year 2010 and revenue to fall between $3.25 billion and $3.45 billion -- expectations that were in line with analysts' forecasts. Also, the company's backlog increased 5.7%, to $6.3 billion. We believe DynCorp's reassuring guidance and increase in backlog are the reasons behind the pop in the stock this morning, given that the Street has become rather negative on defense stocks as the Obama administration looks to cut costs within the sector.

On Monday, we sold about one-third of our position in this name ahead of the quarter for several reasons: Shares were up 15% in two weeks leading into the earnings results, DynCorp has a history of under-delivering in previous quarters, and the position had grown to 7% of the model portfolio. We also said that if we didn't like what management had to say during the conference call, we would look to close out our remaining position.

Given the commentary from management during the call, it appears as if they are doing a great job cutting costs. They are also working on getting paid on time (thereby reducing DSO), which was a burden on the stock in the past. Existing contracts are responsible for much of DynCorp's growth, but increased military activity in Afghanistan could open up additional opportunities.

We maintain our Two rating on DynCorp, but will look to take profits in the $18 area.

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Frank Curzio is a research associate at TheStreet.com.

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