Federal IT Stocks Benefit 'Significantly' From Tax Cut, Says Loop Capital Markets

After President Donald Trump's signing of a $1.5-trillion tax bill that cuts the corporate rate to 21 percent, Loop Capital Markets analyzed the legislation's effect on the IT sector. 

The Analyst

Federal IT services players could benefit from the changes enacted to corporate taxes by the bill, said Loop Capital Markets analyst Joseph Vafi. 

The Thesis

Federal IT services companies derive almost 100 percent of their revenue domestically and will therefore benefit "significantly" from the new tax rate, Vafi said in a note. He estimates a 20-22 percent rise in GAAP net income for undelivered government services. 

Offshore IT services companies, especially those operating in countries like India, already enjoy materially lower tax rates, the analyst said. Federal IT companies remain insulated from any new tax levies on corporate earnings generated abroad, Vafi said

See also: Morgan Stanley: The Biggest Internet Stock Winners From Tax Reform

On the downside, the degree of leverage could cut down the tax change benefit by several hundred basis points through the disallowance of interest expense deductions, according to Loop Capital Markets.

The research firm also projects a boost to cash flows, although it believes this effect may be reduced to some extent due to the widespread use of 338(h)(10) tax elections, which reduces cash taxes paid. If cash flow increases above the level, which permits plowing back money into M&A, Vafi said he expects companies to revisit dividend policies.

Here's a list of stocks that have the largest potential benefit from a lower U.S. corporate tax rate, according to Loop Capital Markets: 

• CACI International Inc CACI
• CSRA Inc CSRA
• Mantech International Corp MANT
• NIC Inc. EGOV
• ICF International Inc ICFI
• Green Dot Corporation GDOT

With only 7 percent of its revenue being international, Vafi said ICF International is expected to "see a solid boost to profitability."

Fintech firm Green Dot's primarily domestic P&L and minimal balance sheet leverage could make it a strong beneficiary as well, Vafi said. 

The Ratings

• CACI International: Hold
• CSRA: Buy
• ManTech International: Buy
• NIC: Hold
• ICF International: Buy 
• Green Dot: Buy

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