Information Technology (IT) services provider Science Applications International Corporation (SAIC) offers its services to the federal and state governments of the United States. The stock has gained 67.3% over the past year, and 20.2% over the past six months, driven by pandemic tailwinds. However, with investors rotating now to turnaround non-tech stocks to capitalize on an economic recovery, SAIC has declined 4.2% over the past three months.

The stock’s recent slump is expected to be short-lived. A wave of cyberattacks on governments worldwide in recent months has been unsettling to individuals and corporations that have adopted remote working models over the last year. With the United States currently grappling with the biggest cyberattack in history, and the recent similar attack on Australian government, the demand for highly encrypted technology services is expected to rise.

Furthermore,  with the U.S. government seeking earnestly to secure its data against such breaches in the future, SAIC needs to revamp its software and services to remain in demand.

Here’s what we think could shape SAIC’s performance in the near term:

Trading at a Discounted Valuation

In terms of non-GAAP forward p/e, SAIC is currently trading at 15.74x, 30.9% lower than the industry average of 22.78x. Its forward non-GAAP PEG ratio of 1.43 is 30.5% lower than the industry average of 2.06.

The company’s forward price/sales and trailing-12-month price/cash flow multiples of 0.78 and 7.25, respectively, compare favorably with  industry averages.

Mixed Financials

SAIC’s $6.88 billion in trailing-12-month revenues is higher than its market capitalization of $5.48 billion, justifying its discounted valuation. The company has stable cash flows, as reflected by its trailing-12-month net operating cash flow and levered free cash flow balances of $771 million and $591.63 million, respectively. SAIC has a trailing-12-month covered ratio of 4.13, reflecting its ability to meet its interest payment liability on its total debt.

However, the company’s high short- and long-term debt is concerning. It has a current ratio of 0.98 and quick ratio 0.86. With total debt of $2.92 billion, the company’s total debt-to-equity ratio stands at 193.58%.

Impressive Growth History but Weak Profitability

SAIC’s revenues have increased at a CAGR of 16.6% over the past three years, while its ebitda increased at a CAGR of 26.7% over this period. Its  net income and total assets have increased at CAGRs of 9% and 40.9%, respectively, over the past three years. Also, its levered free cash flow has risen at a CAGR of 63.1% over the past three years. Its  EPS has increased 24.7% year-over-year.

Despite its impressive growth trajectory, SAIC’s profitability parameters are significantly lower than  its industry’s. Its trailing-12-month gross profit margin of 11.03% is 61.2% lower than the industry average  28.45%. Moreover, the company’s trailing-12-month ebitda and net income margins of 8.72% and 2.99%, respectively, are significantly lower than  respective industry averages.

Consensus Price Target Indicates Potential Upside

SAIC is currently trading 8.9% below its 52-week high of $103.95, which it hit on January 27. Analysts expect SAIC to hit $103.10 soon, indicating a potential upside of 8.8%.

POWR Ratings Reflect Uncertainty

SAIC has an overall C rating, which equates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

SAIC has a B grade of B for Value, and C for Quality and Sentiment. These are justified, given the company’s frail profitability ratios and discounted valuation. Analysts expect  SAIC’s revenues to improve 16.1% year-over-year to $1.79 billion in the quarter ended January 31, 2021. However, its EPS is expected to decline 7.6% in the  quarter. The mixed analyst estimates are in sync with the Sentiment grade.

SAIC is ranked #26 out of 81 stocks in the C-rated Technology – Services industry. In addition to the grades I’ve highlighted, you can check out additional ratings for Momentum, Stability and Growth here.

Check out the top-rated stocks in the Technology -Services industry here.

Bottom Line

SAIC’s ability to upgrade its software and services to meet the new security standards of the U.S. government and other organizations is  unclear. While the company’s contractual relationship with the U.S.  government reflects well  on  the quality of its  services, we think investors should hold off on  investing in the company for now, at least until the company releases upgraded software.

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SAIC shares were trading at $95.73 per share on Wednesday afternoon, up $1.00 (+1.06%). Year-to-date, SAIC has gained 1.55%, versus a 5.34% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...

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