Dynamics Research (DRCO) announced it was part of a winning team for a large Air Force contract:

Dynamics Research Corporation (Nasdaq: DRCO) today announced that it is on the winning Quantech Services, Incorporated team for the U.S. Air Force’s Electronic Systems Center (ESC) Professional Acquisition Support Services (PASS) Indefinite Delivery/Indefinite Quantity (ID/IQ) contract which has a ceiling value of $800 million for the next five years. Quantech is one of eight small businesses awarded a contract by ESC to provide a wide range of non-technical acquisition support services, including support of research, development and production activities at Hanscom Air Force Base in Bedford, Mass. and other geographically separated units throughout the country.

We’ve talked before about the potential for small cap defense contractors to pad the press releases. Dynamics Research doesn’t disclose their role on the team or the portion of the contract going to each winner. However, assuming all 8 get an equal share, spread evenly over the five years leaves $20 million per year in revenue for each team. If Dynamics Research gets half that it would be a $10 million per year contract.

Doesn’t sound like much until you consider DRCO’s guidance for $225 to $240 million in revenue this year. Any contract with the potential to contribute as much as 4-5% to the top line is a significant win.

With the end of the first quarter approaching, it is time to adjust the names in our Watch Lists. We will price all the new lists as of the close on Friday, March 30. Today we present our planned updates to the Small Cap Watch List (Track at Marketocracy).

Frankly, we were surprised at the amount of turnover in our screens. Only 9 of the original 29 names made the cut for the new list (which comes in at only 24 names.) Still, given the level of outperformance we saw in the first quarter (actually just two months) and the fact that much of those gains were achieved early, perhaps the turnover is warranted.

So without further ado, the names on the chopping block from the previous list are:

Silgan Holdings (SLGN - Annual Report); Steel Dynamics (STLD - Annual Report); NVR (NVR - Annual report); Middleby (MIDD); Vector Group (VCG); Sanderson Farms (SAFM); Downey Financial (DSL); Waddell & Reed (WDR); Wilshire Bancorp (WIBC); Harrington West (HWFG); Gamco Investors (GBL); Apria Healthcare (AHG); Papa John’s (PZZA); Cato Corporation (CTR); Meredith Corporation (MDP); CSG Systems (CSGS); Energy East (EAS); Dynamics Research (DRCO); Ingram Micro (IM); and Dade Behring (DADE).

The new watch list will be:

Small-cap watch list member Dynamics Research (DRCO) pre-announced earnings for the fourth quarter that were within the company’s guidance range but above the consensus estimate. According to the News Release:

The company reported preliminary revenue for the fourth quarter of 2006 of approximately $60 million, consistent with previously issued guidance of $59 to $62 million. For the year ended December 31, 2006 preliminary revenue was approximately $259 million. Earnings per diluted share are expected to be in the high end of the range of previously issued guidance of $0.13 to $0.16 per diluted share for the fourth quarter and $0.40 to $0.43 for the full year 2006.

The consensus was expecting $0.13 in earnings per share on $59 million in revenue.

We asked, but no one answered. So we are taking our own counsel and breaking our Watch List into three portfolios: Small Cap, Mid Cap and Large Cap. Each will be tracked against the relevant S&P index going forward from their collective inception date of January 31 (priced at the close of market trading that day.)

For your viewing pleasure, the Small Cap Watch List (Track at Marketocracy) (to be measured against the S&P 600) follows.

In addition, we will provide a “quick and dirty” analysis of each name, with a goal of one such analysis per day. As the name implies, the quick and dirty analysis will be incomplete. We are hoping you will join in the debate and fill the gaps in our analysis.

Small Cap Watch List (Track at Marketocracy) member Dynamics Research (DRCO) issued their earnings News Release:

Dynamics Research Corporation (DRCO), a provider of innovative engineering, technical and information technology services and solutions to federal and state governments today announced operating results for the fourth quarter and full year ended December 31, 2006.The company reported revenue for the fourth quarter of 2006 of approximately $60.3 million, consistent with previously issued guidance of $59 to $62 million. Net income was $1.5 million, or $0.16 per diluted share for the fourth quarter of 2006, compared with $0.31 per diluted share for the same period a year ago. For the year ended December 31, 2006 revenue was $259.0 million, compared with $300.4 million for 2005. Net income was $4.1 million, or $0.43 per diluted share for 2006, compared with $11.4 million, or $1.24 per share for 2005 which included $0.13 of non-recurring gain from the sale of investments.

Wall Street analysts were expecting the company to earn $0.13 on $60 million in revenue, so it was indeed in line. Their guidance looks light on the revenue side, but appears to blow out earnings estimates. “We are focused on achieving continued success from our business development initiatives while concurrently expanding profit margins,” said Jim Regan, DRC’s chairman and chief executive officer.

The company estimates revenues in the range of $225 to $240 million and earnings per diluted share in the range of $0.65 to $0.75 for the calendar year 2007. For the first quarter of the 2007 the company anticipates revenues in the range of $53 to $55 million and earnings per diluted share of $0.11 to $0.13.

Consensus estimates were pegged at $0.52 on $243 million in revenue for the full year and $0.11 on $60 million in Q1. In 2006 new business wins, measured in the estimated first year revenue value of contracts, grew by more than 50%. Total estimated value (all years) of new business contract wins was $145 million in 2006.
Sales are down considerably from a year ago, and the working capital accounts have been scaled back accordingly. New orders were less than sales for 2006, so further slowdown is to be expected. However, trading at an enterprise value of less than 6x EBITDA and 8x free cash flow the stock appears reasonably priced even if sales decline modestly.