DMDC And TSA PreCheck Expansion Will Fuel Future Success

Key Takeaways

• Expansion of programs like TSA PreCheck and DHS projects is poised to drive significant revenue and cash flow growth.
  
• Favorable shift to high-margin Security Solutions will enhance gross margins and strengthen financial health.
  
• Dependence on government contracts and delays, revenue decline in Secure Networks, and cash flow challenges pose risks to Telos' financial stability and growth.

Catalysts

Provides cyber, cloud, and enterprise security solutions in the United States and internationally.

• The successful transition and full operational control of the Defense Manpower Data Center (DMDC) program is expected to drive significant revenue growth in 2025. This program's contribution to revenue growth is anticipated as a major catalyst for future growth. (Revenue impact)
  
• The expansion of the TSA PreCheck program with the target of 500 enrollment centers by the end of the year offers a large growth opportunity. The program is expected to continue delivering significant revenue growth in 2025, becoming a major revenue driver. (Revenue impact)
  
• The favorable mix shift from low-margin Secure Networks to high-margin Security Solutions, which has already led to increased gross margins, suggests further margin expansion as the company capitalizes on its higher-margin business line. (Net margins impact)
  
• The lift of the stop work order on the Department of Homeland Security (DHS) program and the expectation of revenue generation from it in 2025 provides potential for additional cash flow and revenue, particularly given the government-related nature of the contract. (Revenue and cash flow impact)
  
• The forecast for positive cash flow in the first quarter of 2025 and expected improvements in cash flow throughout the year signal operational efficiency and improved financial health, driven by high-growth programs and effective working capital management. (Cash flow and earnings impact)

Telos Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Telos's revenue will grow by 35.4% annually over the next 3 years.
• Analysts are not forecasting that Telos will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Telos's profit margin will increase from -48.5% to the average US Software industry of 12.0% in 3 years.
• If Telos's profit margin were to converge on the industry average, you could expect earnings to reach $32.4 million (and earnings per share of $0.42) by about May 2028, up from $-52.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.9x on those 2028 earnings, up from -4.0x today. This future PE is lower than the current PE for the US Software industry at 31.6x.
• Analysts expect the number of shares outstanding to grow by 1.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.78%, as per the Simply Wall St company report.

Telos Future Earnings Per Share Growth

Risks

• The dependence on government contracts, which are subject to administrative changes and budgetary constraints, presents a risk that could impact Telos' revenue growth and stability.
  
• Delays in government contract awards due to changes in administration contribute to uncertainty in revenue timing, potentially impacting cash flow and earnings predictability.
  
• The decline in Secure Networks revenue and its expected continuation could affect total revenue unless offset by growth in other areas, impacting net margins.
  
• The need to phase ramp-up for TSA PreCheck locations and reliance on achieving a significant market share in enrollment may affect revenue realization timing, impacting cash flow and earnings.
  
• Working capital challenges and the associated cash outflows from high-growth programs and IT infrastructure investments present risks that could affect free cash flow and overall financial health.

Valuation

• The analysts have a consensus price target of $4.0 for Telos based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $6.0, and the most bearish reporting a price target of just $2.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $268.8 million, earnings will come to $32.4 million, and it would be trading on a PE ratio of 11.9x, assuming you use a discount rate of 7.8%.
• Given the current share price of $2.79, the analyst price target of $4.0 is 30.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.