Engility's Reward Is Worth The Risk, Stifel Says In Bullish Initiation

The rewards associated with owning shares of government contractor Engility Holdings Inc EGL are commensurate with the risk, according to Stifel. 

The Analyst

Analyst Joseph DeNardi initiated coverage of the shares of Engility with a Buy rating and $38 price target.

The Thesis

Investing in shares of Engility is risky due to the company's higher-than-average leverage and disappointing revenue growth since its TASC acquisition in 2015, DeNardi said in the initiation note. 

The analyst said he sees many positives in the stock. Engility has a decent execution history, with EBITDA margins in the mid-9-percent range as a result of the TASC buy and its higher-margin intel and space work.

Engility has an experienced management team and has won the confidence of private equity investors KKR and General Atlantic, DeNardi said. 

Despite the higher-than-average leverage and challenging growth prospects, the analyst views Engility as a solid value play.

"Given its current price of around $30, we believe the market still discounts the company's long-term growth opportunities relative to the two-year budget agreement and its ability to delever its balance sheet." 

The concerns about the company's ability to win recompete contracts are overblown, according to Stifel. 

" ... Expect shares to re-rate later in the [the second half of 2018] in conjunction with a broader pickup in awards," DeNardi said. 

The Price Action

Shares of Engility have lost over half their value year-to-date. The stock was up 2.88 percent at the time of publication Friday. 

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