SAIC - Science Applications International: A Fairly Valued Stock

2023-09-27 04:11:04 ET

Summary

• SAIC's Q2 FY24 revenues declined 2.5% due to the sale of its supply chain business, but excluding that, revenues were up 8.3%.
• Net income for Q2 FY24 was $247 million, including gains from divestiture.
• Technical analysis suggests a bearish trend with a potential downside to $101, so it is recommended to hold off on investing in SAIC.

Science Applications International ( SAIC ) offers engineering and IT services. SAIC recently posted its Q2 FY24 results. I will analyze its Q2 FY24 results in this report. The technical chart of SAIC is bearish and indicates a correction. However, its financial performance has been decent over the years. Hence, I assign a hold rating on SAIC.

Financial Analysis

SAIC recently posted its Q2 FY24 results . The revenues for Q2 FY24 were $1.7 billion, a decline of 2.5% compared to Q2 FY23. The decline was majorly due to the sale of its supply chain business and the deconsolidation of the FSA joint venture, which happened last year. If we exclude revenues from these businesses, then its revenues were up by 8.3% in Q2 FY24 compared to Q2 FY23. The revenue growth was fuelled by improved labor productivity and ramp-up on existing contracts. The adjusted EBITDA margin for Q2 FY24 was 9.8%, which was 9.2% in Q2 FY23. The improvement was mainly due to lower indirect costs and strong program performance.

Its net income for Q2 FY24 was $247 million compared to $74 million in Q2 FY23. The net income in Q2 FY24 includes gains from divestiture. In my opinion, the company did fairly well in this quarter. I wouldn't want to invest in the company based on the financial results, even though they were good but not exceptional. The revenue growth and margin improvement were up, but the improvement was modest, and the significant rise in the net income was due to the gain realized from the divestiture.

Technical Analysis

SAIC is trading at $105.3. After making an all-time high of $123.5 in August 2023, the stock price has fallen about 15% since then. Recently, the stock has broken its 200 ema, which is a bearish sign, and looking at the recent candles, I think selling pressure is on in this stock. Talking about the downside possibilities, I believe the stock might reach $101 in the near term, and the reason I am saying this is due to the trendline that the stock has been following since May 2022. The stock price has been religiously following the trendline, and the stock price has never breached the trendline since then. Hence, there is a high chance the stock might reach the trendline, which is at $101, and after touching the trendline, the price might take support from the trendline and might continue its upward trajectory. Hence, looking at the price action, I will suggest avoiding the stock as I see a slight downside from the current level.

Should One Invest In SAIC?

First, look at SAIC's valuation . SAIC has an EV / EBITDA [FWD] ratio of 11.25x compared to the sector median of 10.94x and has a P/E [FWD] ratio of 14.24x, which is in line with its five-year average P/E ratio. The company might look slightly overvalued, but I believe it deserves to trade at a higher multiple because it has consistently grown over the years. Its revenues have grown from $6.3 billion in FY20 to $7.7 billion in FY23, and the EBITDA has grown to $675 million in FY23 from $549 million in FY20. Hence, SAIC trading at a higher multiple is considerable. The company's success is mainly dependent on the U.S. government spending on defense, as the majority of its revenues come from the government. So, if we look at the government spending on defense, it has increased over the years and is continuing to do so. The military budget for FY23 was 6.4% higher than FY22. So, an increase in the military spending will benefit them. But even after so many positives, I don't see any opportunity. I think it is a fairly valued stock, and the current financial results were decent. The revenue growth was positive, and the margins also improved, but the growth wasn't significant or noteworthy, which would force me to invest. In addition, the price chart suggests a small correction in the stock in the near term. Hence, considering all the factors, I assign a hold rating on SAIC.

Risk

Suppose they or the IRS conclude that there has been an ownership change. In that case, their ability to employ net operating loss carryforwards and other tax characteristics to reduce future taxable income may be restricted. As of February 3, 2023, they had projected gross net operating loss carryforwards of $296 million and a tax basis of roughly $1.4 billion in their acquired amortizable goodwill and other intangible assets. Under Sections 382 and 383 of the Internal Revenue Code, there are a number of annual limitations on the use that corporations may make of net operating loss carryforwards and other tax attributes after an ownership change.

Bottom Line

SAIC posted decent financial results, and it has been performing well over the last couple of years, which justifies its higher valuation. I think it is a fairly valued stock, but the technical chart is indicating a slight correction in the share price. Hence, I assign a hold rating on SAIC.

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