Consulting and technology services company ICF International (NASDAQ:ICFI) missed Wall Street’s revenue expectations in Q3 CY2024 as sales rose 3.1% year on year to $517 million. The company’s full-year revenue guidance of $2.02 billion at the midpoint came in 2.3% below analysts’ estimates. Its non-GAAP profit of $2.13 per share was 20.1% above analysts’ consensus estimates.

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Commenting on the results, John Wasson, chair and chief executive officer, said, "This was another quarter of strong performance for ICF. Total revenues increased 3% year-on-year. Revenues from continuing operations increased 6% from last year's levels, which includes a considerable impact from lower pass-throughs.

Company Overview

Originally founded as Inner City Fund, ICF International (NASDAQ:ICFI) delivers consulting and technology services in health, environment, and infrastructure.

Defense Contractors

Defense contractors typically require technical expertise and government clearance. Companies in this sector can also enjoy long-term contracts with government bodies, leading to more predictable revenues. Combined, these factors create high barriers to entry and can lead to limited competition. Lately, geopolitical tensions–whether it be Russia’s invasion of Ukraine or China’s aggression towards Taiwan–highlight the need for defense spending. On the other hand, demand for these products can ebb and flow with defense budgets and even who is president, as different administrations can have vastly different ideas of how to allocate federal funds.

Sales Growth

A company’s long-term performance is an indicator of its overall business quality. While any business can experience short-term success, top-performing ones enjoy sustained growth for multiple years. Unfortunately, ICF’s 6.5% annualized revenue growth over the last five years was mediocre. This shows it couldn’t expand in any major way, a tough starting point for our analysis.

We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. ICF’s annualized revenue growth of 8.8% over the last two years is above its five-year trend, suggesting some bright spots.

This quarter, ICF’s revenue grew 3.1% year on year to $517 million, falling short of Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 8% over the next 12 months, similar to its two-year rate. This projection is above average for the sector and indicates the market thinks its newer products and services will help sustain its historical top-line performance.

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Operating Margin

ICF was profitable over the last five years but held back by its large cost base. Its average operating margin of 6.9% was weak for an industrials business.

On the plus side, ICF’s annual operating margin rose by 1.8 percentage points over the last five years.

In Q3, ICF generated an operating profit margin of 8.9%, up 2.5 percentage points year on year. This increase was a welcome development and shows it was recently more efficient because its expenses grew slower than its revenue.

Earnings Per Share

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth was profitable.

ICF’s EPS grew at a remarkable 12% compounded annual growth rate over the last five years, higher than its 6.5% annualized revenue growth. This tells us the company became more profitable as it expanded.

We can take a deeper look into ICF’s earnings to better understand the drivers of its performance. As we mentioned earlier, ICF’s operating margin expanded by 1.8 percentage points over the last five years. On top of that, its share count shrank by 1.4%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

Like with revenue, we analyze EPS over a more recent period because it can give insight into an emerging theme or development for the business.

In Q3, ICF reported EPS at $2.13, up from $1.81 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects ICF’s full-year EPS of $7.27 to grow by 2.8%.

Key Takeaways from ICF’s Q3 Results

It was good to see ICF raise its full-year EPS guidance, which blew past analysts’ expectations. We were also excited this quarter's EPS outperformed Wall Street’s estimates. On the other hand, its revenue missed and its full-year revenue guidance fell short. Overall, this was a mixed quarter. The market seems to care more about the better-than-anticipated profitability, and the stock traded up 2.9% to $173.10 immediately following the results.

So do we think ICF is an attractive buy at the current price? The latest quarter does matter, but not nearly as much as longer-term fundamentals and valuation, when deciding if the stock is a buy. We cover that in our actionable full research report which you can read here, it’s free.