Investing.com -- Shares of several government services firms could be facing increased pressure due to their exposure to DOGE-related contracts, as per analysts at Barclays.
The brokerage outlines potential risks to earnings per share stemming from government work classified under the North American Industry Classification System, with up to 10% of revenue at risk for some firms.
Government services contractors derive their earnings from a wide array of NAICS work scopes, but Barclays identified approximately 20 specific categories that could be most vulnerable.
The key concerns cited in the report include a lack of criticality in certain contracts, a shift toward cost-cutting measures, and the potential for increased insourcing of previously outsourced work.
The brokerage flags that facilities support services, technical consulting, and administrative management consulting are among the most exposed categories.
Within the sector, Booz Allen (NYSE:BAH) Hamilton, CACI International, Leidos Holdings (NYSE:LDOS), and Science Applications (NASDAQ:SAIC) International Corporation are the companies Barclays highlighted as having the highest relative exposure.
For Booz Allen Hamilton, exposure is largely concentrated in administrative management and consulting services, which account for approximately 5% of its revenue, while professional, scientific, and technical services contribute another 4%.
CACI International, on the other hand, has significant exposure to investigation and personal background check services, representing 4% of its portfolio, as well as professional, scientific, and technical services at 2%.
Leidos’ primary risk comes from its 7% exposure to facilities support services, an area that may be particularly susceptible to cost-cutting initiatives.
Meanwhile, Science Applications International Corporation’s most at-risk segments include professional and management development training (3%) and legal services (2%).
The potential financial impact of DOGE-related reductions is not insignificant. Barclays estimates that in a base-case scenario where 50% of at-risk work is canceled, the earnings downside could range between 2-3% for most of the firms.
The impact varies by company, with SAIC likely to face the most pronounced hit at 3.2%, while Leidos is expected to experience a 2.3% decline.
Barclays also outlines worst-case scenarios in which 100% of identified at-risk revenue is lost, which could drive an 8-11% reduction in EPS across the affected firms.
Such an outcome would not only weigh on quarterly performance but could also prompt broader strategic shifts in the industry.
In terms of valuation, the government services sector now trades at approximately 14 times its next 12 months’ price-to-earnings (N12M PE) ratio, marking a 30% discount relative to the S&P 500.
Within the group, Booz Allen Hamilton is the most expensive at 17x, while SAIC is the cheapest at 12x.
The sector also trades at an 11x enterprise value-to-EBITDA multiple (EV/EBITDA), a roughly 25% discount to the broader market.
Free cash flow yield for the group sits at 8%, further emphasizing a valuation disconnect compared to the S&P 500.
The brokerage also notes that while these companies have diversified contract portfolios, the identified risks could lead to a period of earnings pressure if government agencies move forward with contract restructuring or reductions.