When an internal Army report implicated contractors in the abuse of Iraqi prisoners, it wasn't just senators who were floored to learn that contractors conduct interrogations. The revelation also surprised people who are paid to study the business of contractors: stock analysts.
Meir T. Ukeles, an analyst for S.G. Cowen & Co., said he knew CACI International Inc., an Arlington contractor, was doing "tactical work in support of Army intelligence."
"But if you had a put a gun to my head and said, 'What does that really mean?' I'm not sure I would have said interrogation," Ukeles said.
Because companies are prohibited from discussing classified work, it's sometimes hard for the stock analysts who cover them to know what the contractors are really doing. Analysts are given financial information on classified business, such as total sales and average profit margins, but few details about the work itself. Analysts and investors rarely balk at the restrictions.
But the prisoner abuse scandal at Abu Ghraib suggests that the hazy world of intelligence work can pose serious legal and financial risks that analysts are not in a position to judge.
Since the Sept. 11, 2001, attacks, the government has poured money into technology projects meant to upgrade intelligence operations. Private companies with clients such as the National Security Agency charge 25 to 33 percent more than contractors that work for agencies such as the Department of Health and Human Services, according to an analysis by the investment bank Houlihan Lokey Howard & Zukin in McLean.
In a situation reminiscent of the late '90s boom in commercial technology stocks, the current success of the contractors is a big reason analysts may be less inquisitive, some analysts and experts said.
"At a time when budgets are growing, people are willing to hold their breath a little bit," said Pierre A. Chao, a senior fellow studying defense industry issues at the Center for Strategic and International Studies and a former equity analyst at Credit Suisse First Boston. "In slower times, I guarantee you those companies will carry a valuation discount."
Several analysts said they were unaware that CACI employees worked as interrogators. They said the allegations of prison abuse would probably not have a long-term financial impact on the company, although in the short term, the scandal has been unpleasant for investors. The stock has fallen 10 percent since May 3 and is well below its 52-week high of $53. The company is now worth about $1.18 billion, about $130 million less than its market value May 3. CACI shares closed yesterday at $40.55, down 23 cents.
"I don't think analysts fully understood the extent of outsourced warfare," said Timothy J. Quillin, an analyst for Stephens Inc. "I think there's a certain type of classified work that adds risk and that specifically is outsourced labor," especially positions that jostle against the military chain of command, he said.
Other analysts argued that any work that involves direct contact with civilians, such as driving a truck in a war zone, is high-risk.
Companies are sometimes willing to offer general descriptions of projects, but can't name the government agencies that hired them. In some cases, contractors are not even allowed to acknowledge the existence of a contract.
The result is that analysts may know that companies are building prototypes of surveillance equipment or designing databases to mine intelligence data, but not much beyond that. Sometimes analysts can piece together conclusions about classified work by linking news about big defense programs with their knowledge about a company's technology or service.
For example, Ukeles said that when he covered Veridian Corp., a government contractor purchased by General Dynamics Corp. in August, he knew the company was involved in space-based reconnaissance, such as high-resolution satellite photography. When he heard reports that a big National Reconnaissance Office project to update the nation's spy technology in space could be delayed, he asked executives how that would affect Veridian's satellite imagery business. That very specific question elicited some useful information, he said.
"There are fewer things that are firm and concrete in this business," Ukeles said. "You have to hold onto those."
Another problem is that government contractors often have hundreds or even thousands of small classified contracts or task orders. Since each project represents a negligible amount of revenue, companies tend to lump such contracts together. ManTech International Corp., a Fairfax-based contractor, does 72 percent of its business for intelligence agencies but doesn't break that figure down any further.
Still, with federal money pouring into military and defense contracting, investors are unlikely to stay away, analysts said. Or, as Chao put it, investors will continue to balance on "that fine line between greed and terror."