Even though we’ve all seen this movie before, the suspense is real every time. Sort of like “Psycho.”
The U.S. Congress is faced, once again, with raising the federal debt ceiling. Some government agencies may begin shutting down operations as soon as next week. Worse, though, is the threat that the U.S. government will default on its debt. A former aide to Senate minority leader Mitch McConnell told the New York Times that there’s a one-in-five chance that the United States may technically default on the federal debt, a level he called “crazy high” and “the level of panic we should be having.”
If the federal government has to choose between paying bondholders or paying vendors and government employers, bondholders are likely to come out on top. That’s a threat to some companies that do virtually all their business with the U.S. government.
Huntington Ingalls Inc. (NYSE: HII) builds ships. Big, expensive aircraft carriers and nuclear-powered submarines. In its latest fiscal year, 97% of the company’s fiscal 2020 revenue total of $9.36 billion was derived from federal government contracts. Congressional passage last week of a $798 billion defense budget for the coming fiscal year gave the shares a 5% boost as of Monday morning. Still, if the federal debt ceiling is not lifted, contract payments to the company (and many others) could be delayed. It is the uncertainty that could begin to weigh on the stock price.
Huntington Ingalls pays a dividend yield of 2.3%, and the stock is up 44% over the past 12 months. At a price of around $198.60 per share, the potential upside on the stock, based on a median price target of $230, is nearly 16%.
Science Applications International Corp. (NYSE: SAIC) reported that 98% of $7.06 billion of fiscal 2021 revenue came from federal government contracts. SAIC offers a variety of software services to its customers, including IT-as-a-service. Like Huntington Ingalls, the company’s shares have risen by around 5% over the past week.
SAIC pays a dividend yield of 1.7%, and the share price has gained about 13% over the past 12 months. At a price of around $86.60, the upside potential, based on a median price target of $105, is 21%.
Intelligence and security software and services provider CACI International Inc. (NYSE: CACI) derived about 96% of its $6.04 billion in fiscal 2021 revenue from federal contracts. Nearly 18.5% of the company’s outstanding shares are owned by 107 ETFs. That is remarkable because CACI does not pay a dividend.
Over the past 12 months, the company’s stock price has added more than 19%, and at a price of around $257.50, the upside potential, based on a median price target of $300, is 16.5%.
Booz Allen Hamilton
Booz Allen Hamilton Holding Corp. (NYSE: BAH) is a management and technology consulting firm that derived 97% of its fiscal 2021 $7.86 billion in revenue from government contracts. Two weeks ago, the company acquired a digital forensics and incident response firm for an undisclosed sum. The company said at the time that the acquisition was part of its capital deployment strategy to gain a stronger foothold in critical technology areas.
Booz Allen pays a dividend yield of 1.87%, and the share price has dipped by about 4.5% over the past 12 months. At a price of around $79.70 a share, the upside potential on the stock, based on a median price target of $96, is more than 20%.
Oak Street Health
Oak Street Health Inc. (NYSE: OSH) provides primary care services for Medicare patients. Social Security and Medicare payments are always threatened by a potential government shutdown, and this time is no different. Oak Street, directly and indirectly, received 96% of its fiscal 2020 revenue from the federal government.
The shares have dropped about 1% over the past 12 months, including a slide of around 34% since early August. The company does not pay a dividend. At the recent share price of around $47.90, the upside potential on the stock, based on a median price target of $67, is nearly 40%.