Investors tend to avoid companies that generate too much revenue from one key customer or project. If that project ends, sales could easily plunge. That fear is the key reason behind a sharp sell-off in shares of Dyncorp (NYSE: DCP), a key government contractor in Iraq. Shares have fallen from over $20 last summer to a recent $11. But things are beginning to look up…

To be sure, the recent elections in Iraq indicate that the U.S. presence in the country is bound to diminish, and Dyncorp is poised to generate weaker sales and profits from projects in Iraq. Yet investors appear to be overlooking the fact that Dyncorp has been building a robust backlog elsewhere in the world, and looks set to keep boosting sales and profits.

Dyncorp offers a very wide range of services to Uncle Sam and other governments including: police and military training, intelligence services, security, linguistics and translation services, aviation fleet management and logistics. Contracts for these services typically appear large in terms of dollar size, but profit margins are fairly thin. Dyncorp typically generates operating margins of around 5% or 6%.

Dyncorp provides a range of services in Afghanistan including food service, vehicle maintenance, power generation, sanitation, etc. Most importantly, the company is training police officers and soldiers in order to eventually enable the Afghan government to provide its own security.

To be sure, operations in Afghanistan will eventually wind down, but Dyncorp continues to pursue new business in many other countries. For example, the company provides ongoing support services to all eight U.S. military bases in Kuwait. And recent acquisitions have helped bring exposure to government consulting in areas such as anti-corruption and anti-drug efforts. As Washington seeks to rein in budget deficits, Uncle Sam may not throw much more business to Dyncorp in the foreseeable future. But other countries are expected to deepen their relationship with the company.

As a result, Dyncorp’s backlog stood at $6.1 billion at the start of 2010, which represents about 20 months of annualized revenue. On a recent conference call, Dyncorp’s management ran through a host of new bids that the company is chasing. It appears that backlog will at least stay flat if not grow in coming quarters. This should help the company to maintain sales growth in the +5% to +10% range. Fiscal 2009 sales grew +45% and look set to grow about +10% in the fiscal year that ends later this month. Dyncorp looks set to earn around $1.35 a share and generate around $225 million in EBITDA in fiscal 2010. Those numbers look pretty intriguing in relation to the current stock price.

After the steady downdraft in shares during the last six months, they now trade for about 8.3 times earnings — a P/E ratio roughly half the market average. Rivals KBR (NYSE: KBR) and Fluor (NYSE: FLR) trade at 13.2 and 15.2 times projected 2010 profits. The key profit catalyst for Dyncorp now is new contract awards, which as management noted, could be announced in coming weeks and months. As they roll in, investors will gain increased confidence that sales and profits can keep growing, and those ultra-low valuations should start to attract the value crowd.

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