The company's commitment to free cash flow counterbalances evolving market threats. By Todd Chanko
"We're already battled-hardened, with hundreds of confirmed kills." These comments by CACI International CEO John Mengucci on the efficacy of its Merlin counter-unmanned aircraft system could also describe the company's success in free cash flow generation -- and in winning the $150 billion electronic warfare market.
Founded in 1962, the same year as the Cuban Missile Crisis, Reston, Va.--based CACI provides national security technologies to the U.S., the United Kingdom, and 15 NATO countries, with potential expansion in other territories. The company's portfolio comprises land, air, and sea sensors for detecting drones and other threats; agentic AI software, which provides analytics; and human expertise across software, cyber, and military domains.
All told, this market is estimated at $280 billion, and CACI is expanding its share. In its fiscal 2026 first quarter ended September 2025, the company grew revenue 11% year over year to $2.3 billion. Adjusted diluted earnings per share increased 15.5% to $6.85, and free cash flow rose 189% to $143 million. In fact, CACI has more orders than it can process. The company's backlog jumped 4.6% year over year to a record $34 billion -- the equivalent of about four years of revenue.
The company reaffirmed its fiscal year 2026 guidance on its latest earnings call. It forecast about 8% revenue growth to $9.3 billion, adjusted diluted earnings growth of about 22% to $27.58 per share, and free cash flow growth of at least 16% to $710 million. These forecasts imply a 10-year compounded annual growth in free cash flow of 13%; at current price levels, CACI generates a 4.6% free cash flow yield.
Since reporting these results in October, CACI announced four major orders from the U.S. military totaling up to $852 million. NATO's commitment for all members to effectively spend 5% of GDP on defense, announced at its summit in June, should provide additional tailwinds to CACI's business.
"DOD's shift to agile, software-defined solutions, tighter cyber requirements, and growing space/network modernization budgets are tailwinds squarely in CACI's lane," says Richard Stroud, assistant portfolio manager at London-based TrinityBridge, which held 314,000 shares as of Sept. 30, according to filings.
CACI's investment in Merlin, its newest entrant in counter-unmanned aircraft systems, or counter-UAS, is likely to benefit from new Department of Homeland Security requirements. "It's multiples of billions that will be spent on a layered defense that is going to have to defend against unmanned systems," Mengucci said on CACI's latest earnings call. "Frankly, uncrewed systems are a very different beast. Traditional radar isn't going to find that. It's going to look like a bird."
The company currently derives $2 billion -- about 20% of total revenue -- from electronic warfare, which includes counter-drone sales and terrestrial layer system manpacks, Mengucci said. The counter-drone systems market alone is expected to grow at a compounded annual growth rate of 25%, to surpass $20 billion by 2030, according to MarketsandMarkets, a research firm.
"At the end of the day, the government is going to go with systems that have been deployed, where combatant commanders swear by the fact that they want one of what we have," Mengucci said. "It's a burgeoning market. We've been in it for a couple of decades. I think we understand it very, very well."
That confidence is shared by Jonathan Evans, an analyst at Dallas-based asset manager Barrow Hanley, which held 301,000 shares in CACI as of Sept. 30, according to filings. CACI is "a unique and misunderstood business that is underfollowed, despite a really successful history of compounding earnings and free cash flow per share and delivering spectacular shareholder returns," Evans says. "CACI invests ahead of the curve, ahead of customer need, building out different capabilities that serve national security interests."
Selling its existing arsenal of national security technologies and expertise into the expanding budgets of domestic and international agencies is but one growth path for CACI: "We're a $9.3 billion company in a $280 billion total addressable market," Mengucci said on the call. CACI's "gap-driven" approach to M&A may launch CACI to the next tier. "They're not trying to just go out and buy revenue," Evans said. "There's a gap, whether it's a customer or a capability gap that they're looking to fill."
The December announcement of CACI's acquisition of ARKA Group, a "leading technology provider to the national space community," demonstrates this strategy. The all-cash, $2.6 billion deal expands CACI's space technology portfolio, integrating ARKA's space-based sensors, agentic AI capabilities, and laser warning systems into CACI's land, air, and sea-based platforms and existing artificial intelligence and intelligence-gathering operations. The deal, closing this quarter for CACI, is expected to be accretive to revenue and earnings before interest, taxes, depreciation, and amortization, or Ebitda, over the next 12 months, and fully accretive to free cash flow in fiscal 2028.
The company doesn't pay a dividend, but in the past 12 months repurchased $169 million in shares, returning about 1.7% to shareholders. Net debt as of Sept. 30 was 2.6 times trailing 12-month Ebitda, though the recent ARKA acquisition is expected to raise net leverage as of March 31, 2026, to 4.3 times. However, CACI's robust backlog, and ARKA's expected contributions of $650 million of revenue and $145 million of Ebitda, respectively, over the next 12 months should ease any concerns about the balance sheet.
As CACI manages risk on a global scale, investors, too, must manage their own risk. While CACI has demonstrated consistent top- and bottom-line growth over the past 10 years, it could face dramatic shifts in governmental priorities, the threat of competitors offering superior technology at lower costs, or skilled labor shortages. A peace deal in Ukraine would have no immediate material impact, however, as any CACI technologies deployed in that theater have already been procured by the U.S. Department of Defense.
A very conservative discounted cash flow valuation -- growing free cash flow at 3% for 10 years -- yields a target price of $965 for the stock, corresponding to a gain of 57% from current prices. If the forward price/earnings multiple expands to 25 from the 20.2 forecast, at a fiscal 2026 forecast earnings per share of $27.58, the target price is $689.50, 14% higher than today. Assuming CACI continues its disciplined approach to growth, it could reach $827 within the next 12 months, presenting investors 37% upside from current levels.
That is some actionable intel for investors.
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January 16, 2026 21:30 ET (02:30 GMT)
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