UBS starts coverage on gov service providers stock amid spending uncertainty

Investing.comDec 3, 2024 12:56 AM

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Investing.com -- UBS started coverage on U.S. government IT and services companies, highlighting a mix of growth potential and risks amid ongoing budget uncertainties.

Brokerage gave a “buy” rating to CACI International Inc (NYSE:CACI) and “neutral” rating to Booz Allen Hamilton Holding (NYSE:BAH), Leidos Holdings Inc (NYSE:LDOS) and Science Applications International Corp (NASDAQ:SAIC).

The gov IT sector has transitioned from a labour-intensive model to providing high-tech value-add services for government agencies. UBS said the group faces headline risks from potential budget cuts driven by government efficiency initiatives under the Department of Government Efficiency (DOGE).

UBS favours CACI’s strong exposure to the Department of Defense and Department of Homeland Security, its focus on technology-driven solutions, and its strategy of bolt-on acquisitions. UBS sees upside potential to consensus estimates, positioning CACI as the best buy in the group.

While Booz Allen historically outperforms peers in growth, UBS noted its heavy exposure to non-defense federal agencies, including the Department of Veterans Affairs (VA) and Health and Human Services, increasing its vulnerability to budget cuts.

Science Applications is in the early stages of a turnaround, but UBS prefers to wait for clearer progress given the macroeconomic uncertainties.

“Government austerity is not our base-case scenario in the current environment of elevated global geopolitical tension and rapid technological advancement, and the 20% de-rating in stocks since the election may ultimately prove overdone” UBS stated, pointing to potential market volatility if proposed budget cuts gain traction.

While the Gov IT sector remains vulnerable to headline risks, UBS sees selective opportunities, particularly in CACI, due to its defense-centric business and technological expertise. Investors are advised to tread carefully as the budget landscape unfolds.

Reviewed byTony

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