RBC Downgrades KEYW Holding

RBC Capital Markets’ Robert Stallard downgraded the rating for KEYW Holding Corp. KEYW from Outperform to Sector Perform, while reducing the price target from $11 to $7.

KEYW Holding reported better-than-expected 4Q15 sales of $80.7 million and EBITDA of $4.1 million, driven by increased sales. The company has guided to a 4.2 percent y/y increase in its 2016 government revenue of $280-$305 million. The company also guided to flat adjusted EBITDA in the first half of 2016, with a return to low-to-mid teens in the second half.

Analyst Robert Stallard mentioned that the planned divestiture of the company’s Hexis commercial cybersecurity business will shift the focus to the more profitable government IT segment. Hexis has been a significant drag on cash involving heavy upfront investment while fighting tough competition.

Although the divestiture of Hexis will remove a great deal of risk and earnings drag from the stock, it will also remove the growth and takeout premiums generally enjoyed by start-up commercial technology businesses, Stallard pointed out.

KEYW Holding is targeting long-term incremental revenues of $20-$25 million from the 12 intelligence agencies, currently not served by it. The EPS estimates for 2016 and 2017 have been raised from ($0.47) to ($0.12) and from ($0.15) to $0.08, respectively.

“After the big move in the share price (+39% in 2 days), we see limited upside from here,” Stallard stated.