ICF International: Sturdy Fundamentals, Stock Price Quite High (NASDAQ:ICFI)

Macroeconomic headwinds intensified as inflation set a brand new all-time excessive in 2022. It stretched quicker and additional than anticipated, prompting policymakers to stabilize costs. In flip, rates of interest soared and enticed financial savings relatively than borrowings and investments. Unsurprisingly, demand softened, matched by the clearing provide chain bottlenecks. This noticeable change curtailed buying energy and manufacturing quantity throughout industries. However for some, it turned a chance to shine and increase.

ICF Worldwide, Inc. (NASDAQ:ICFI) used the state of affairs to its benefit. It turned a staple as companies and policymakers needed to rethink their insurance policies. And now, it continues to flourish and increase as its experience stays essential for the market. It practices what it preaches, given its well-balanced progress and viability. It capitalizes on its methods to stabilize revenues and margins amidst inflation. Even higher, it maintains an honest monetary positioning to make sure sustainability. This facet permits it to cowl its working capability, borrowings, and capital returns. Likewise, the inventory worth stays per the sound fundamentals. Nonetheless, the uptrend seems fairly extreme, resulting in restricted upside potential.

Firm Efficiency

The previous three years have been a collection of crests and troughs for the US economic system. The unprecedented occasions in 2020 led to an enormous downturn. Additionally, the pandemic restrictions made it difficult to maintain financial restoration. In 2021, issues had been far totally different, characterised by a sturdy financial rebound. However not a 12 months later, issues turned nearly 100 and eighty levels. Macroeconomic volatility was evident prior to now three quarters. As inflation rose 9.1%, the demand and manufacturing capability decreased. Some industries noticed well-maintained progress with their pent-up demand. Nonetheless, the general impression was unfavorable. To fight the rising costs, The Fed raised rates of interest by 75 bps in 4 quarters. It proved useful, however macroeconomic headwinds continued. At the moment, recession fears stay intense, prompting companies to regulate their working capability. But, ICF Worldwide inventory continues to capitalize on its progress and growth. It nonetheless reveals engaging progress prospects amidst blended market situations.

It began the 12 months sturdy with its working income of $483.28 million, a 17% year-over-year enhance. It was spectacular, given the grim market prospects within the earlier quarters. We are able to attribute its profitable enterprise executions to varied components. Its broad-based progress was pushed by the sturdy demand from its purchasers. The federal and native authorities establishments are the cornerstones of its operations. In reality, these are firm strengths, particularly during times of volatility and downturns. Authorities purchasers are extra fastened, resulting in a safer income stream. Let’s face it. Many companies might go bankrupt in some industries, even the trade giants. However most of the time, authorities establishments and enterprises will stay protected. In spite of everything, their revenue comes from taxes, FDIs, portfolios, exports, and plenty of extra sources. These additionally fluctuate with macroeconomic tendencies, however these are safer. However what’s extra spectacular is the 19% enhance within the business phase. So aside from the worldwide authorities, all remaining segments had a double-digit enhance.

ICFI’s distinctive enterprise mannequin is appropriate for the present market panorama. Other than its demand, a contract-based enterprise ensures long-term partnerships. It’s extra essential right this moment amidst the tight competitors. The one draw back is the decrease pricing flexibility. But, it applies to contracts earlier than 2022. The corporate also can have extra freedom to conduct tasks with improved effectivity. Pricing and advertising methods work nicely with its enterprise mannequin. This transfer permits ICFI to retain purchasers or cowl the change within the variety of purchasers by means of pricing. In 4Q 2022 and 1Q 2023, the corporate received fifteen contracts, as proven in its press releases. One other core power of ICFI is its capitalization on accretive acquisitions. Within the second half of 2022, it made two acquisitions to increase its capability. It paid off within the subsequent two quarters by means of elevated revenues. Its funding in applied sciences also can assist enhance effectivity and enhance its market attraction. As the decision for extra sustainable and eco-friendly enterprise operations intensifies, ICF should adapt to it. It’s a part of its companies. However extra importantly, it should preserve buyer ties and partnerships. It’s important because it caters to IT modernization, catastrophe administration, and ESG companies.

However what makes ICF a stable firm is its environment friendly asset administration. Amidst the rising costs, it saved its bills manageable in 1Q 2023. Its SG&A bills remained flat, exhibiting effectivity in dealing with its labor and expertise. This facet additionally demonstrated the dedication of the corporate to serving to purchasers make strategic enterprise insurance policies and choices. As such, its margin stayed secure at 7.4% versus 7.7% in 1Q 2022. It was additionally the bottom prior to now 5 quarters. We are able to attribute it to the rise in direct working prices. Regardless of this, the precise working revenue of $36 million was higher than in 1Q 2022, with $32.12 million. It was additionally the second-highest working revenue. Certainly, its growth remained fruitful, given the growing revenues and working revenue.

This 12 months, the corporate might face the identical challenges as recession woes proceed. However given its historic efficiency and present enterprise mannequin, I consider the corporate can get by means of them. It decreased its worldwide operations after exiting UK strains. However the contract received in Puerto Rico can partially offset it. Additionally, it was immaterial to the worldwide phase of the corporate since many consumers are in Canada. Even higher, it has already received two contracts this quarter. It could additionally higher handle its bills as costs grow to be extra secure. We’ll cowl it in additional element within the following part.

How ICF Worldwide Might Keep Afloat This 12 months

We already noticed how ICF Worldwide, Inc. remained unperturbed amidst macroeconomic volatility. The truth that it was essential for strategic enterprise choices amidst the rising costs and socio-environmental points drew extra demand for its companies. Nonetheless, we should acknowledge the chance surrounding the enterprise. Rate of interest hikes stay the first danger that the corporate faces. As The Fed maintains its conservative strategy to combating inflation, it raises rates of interest. It continues to have an effect on the enterprise, as we see within the substantial enhance in curiosity expense. It should additionally watch out because it has excessive monetary leverage. Its borrowings are equal to 40% of the entire belongings. If rate of interest hikes proceed, the price of borrowing might enhance extra. The comfort is that solely 8% of borrowings have present maturities. Additionally, the rise in rates of interest has slowed down not too long ago.

Quite the opposite, potential alternatives outweigh dangers. The best method is by trying on the present inflation price. At 4.9%, inflation has slowed by 46% from its 2022 peak. Though demand might take extra time to regulate, optimistic spillovers might materialize. If the downtrend continues, rate of interest hikes might proceed to chill down or at the very least keep flat at 25 bps. It will likely be simpler for the corporate to win contracts and alter bills to maintain its progress and enhance margins. It could additionally result in extra enterprise openings and assist ICFI penetrate the business phase extra. As of 1Q 2023, the portion of the business phase elevated from 24% to 25%. It signifies the elevated presence of ICFI within the non-public sector and its enhanced business market attraction. Given its capitalization on prudent acquisitions, it might be simple to maintain its growth. It could enhance its focus on the business phase within the US. In spite of everything, enterprise openings have elevated not too long ago. Within the SMB sector, SMEs rose from 32.5 million to 33.2 million in 2Q 2022. Additionally, new enterprise openings remained excessive at 5 million purposes. It was decrease than in 2021, with 5.4 million, however the complete variety of companies saved growing. With the continued lower in inflation, recession woes might lower at some ranges. It could additionally maintain enterprise formations. In keeping with doola, the typical value of forming a non-public enterprise is just $197 plus state charges. If we mix the impression of decrease inflation with the digital and fintech revolution, the enterprise sector might regain momentum.

Furthermore, an honest monetary positioning might help ICFI navigate the present market panorama. Money could also be irrelevant at solely $8.94 million, however receivables have elevated to $417.58 million. It might be dangerous since it may possibly result in huge defaults and delinquencies. However we should perceive that its purchasers are the federal and native authorities and personal companies of various sizes. Their mixed quantity includes 21% of the entire belongings, making ICFI a liquid firm. Additionally, the Internet Debt/EBITDA Ratio of 1.97x reveals that the corporate earns sufficient to cowl its borrowings. We are able to affirm the fruitful use of its sources within the Money Circulate Assertion. Its Money Circulate From Operations turned unfavourable in 1Q 2023. However we are able to see that it paid a considerable portion of its accounts payable and accrued bills, which we are able to affirm of their actions within the Stability Sheet. If the corporate had saved its accounts payable and accrued bills on the earlier degree, it could have realized money inflows. The factor is, the core operations of the corporate can cowl its operations, present borrowings, and payables. We are able to see it within the common money burn of $82,100. With that, the corporate has 9 years to deplete its money with out growing its monetary leverage. It’s logical since it’s not a capital-intensive firm. The important factor is that the corporate continues to steadiness progress and viability with sustainability.

Inventory Worth Evaluation

The inventory worth of ICF Worldwide, Inc. has been reducing through the years. There have been some corrections, however the uptrend remained distinguished. At $112.91, the inventory worth is already 17% greater than final 12 months’s worth. It has already exceeded the intrinsic worth of the corporate. We are able to affirm it utilizing the PB Ratio, given the present BVPS of 45.01 and PB Ratio of two.47x. If we use the present BVPS and the typical PB Ratio of two.28x, the goal worth will probably be $102.84.

In the meantime, it’s a safe dividend inventory with constant payouts. Nonetheless, its yields are solely 0.49% versus the S&P 600 and NASDAQ common of 1.72% and 1.55%. We are able to attribute it to the potential overvaluation and low dividends. Regardless of this, dividends stay well-covered, given the Dividend Payout Ratio of 16%. Additionally, the corporate makes up for it by means of constant share repurchases. We are able to additionally examine the cumulative EPS and common inventory worth change since 2019 to verify the funding returns. Utilizing the cumulative EPS of $13.56 and the inventory worth change of $19.37, the distinction will probably be $5.81 or $1.37 per 12 months. For each $1 enhance in EPS, the inventory worth elevated by $1.37. The corporate offers respectable funding return prospects, making it a perfect inventory. To evaluate the inventory worth higher, we’ll use the DCF Mannequin.

FCFF $144,095,000

Money $8,940,000

Borrowings $831,340,000

Perpetual Development Fee 4.4%

WACC 9.2%

Widespread Shares Excellent 18,788,000

Inventory Worth $112.91

Derived Worth $107.02

The derived worth reveals that the inventory worth has potential overvaluation. There could also be a 5% lower within the subsequent 12-18 months. Given the spectacular firm fundamentals, I’m including ICFI to my watchlist. However given the inventory worth, we might have to attend earlier than buying shares. There could also be restricted upside potential.

Backside Line

ICF Worldwide, Inc. is a stable firm with a sturdy efficiency amidst macroeconomic volatility. Its distinctive enterprise mannequin, prudent growth, and operational effectivity are its cornerstones. It additionally has an honest monetary positioning that reveals sustainability. Even higher, it continues to make capital returns by means of dividends and share repurchases. In the meantime, the inventory worth retains growing and stays per the basics. However the precise inventory worth is greater than the intrinsic worth of the corporate. The inventory is an effective cut price at $102-105. The advice, for now, is that ICF Worldwide, Inc. is a maintain.