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SAIC, Inc. (SAI): Room to Run or Waiting for a Fall?

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McLean, Virginia-based military contractor SAIC, Inc. (NYSE:SAI) has long been the target of conflicting investor emotions. As one of the United States’ most prominent logistics and defense firms, the company enjoyed a strong run during the post-9/11 defense boom. Indeed, many market-watchers have explained its continued strong performance by pointing to an “afterglow effect” of sorts from wars in Iraq and Afghanistan.

This has led some of the same folks to conclude that SAIC, Inc. (NYSE:SAI)’s fortunes will correct during the defense draw-down that is widely expected to occur over the next few years. While the company does not earn all of its revenues from the U.S. military, a reduction in the number of contracts for which it is eligible to apply would surely hurt its profitability and may well lead to financial losses. Then again, SAIC, Inc. (NYSE:SAI) has won several prominent contracts lately and shows few signs of decelerating. In any case, it bears closer scrutiny.

SAIC, Inc. (NYSE:SAI) manufactures and operates a number of hardware systems in the defense, reconnaissance and military support spaces. Many of its applications are remote, computer-operated systems that act as “eyes and ears” in dangerous parts of the world. Although it does build remote-operated submersibles, it is important to note that SAIC, Inc. (NYSE:SAI) does not manufacture the types of “attack drones” that have lately generated so much political controversy. As such, it has less exposure to a particularly vulnerable aspect of defense spending.

Financially, SAIC, Inc. (NYSE:SAI) is in solid shape. In 2012, it earned $512 million on approximately $11.2 billion gross revenues. This provided a decent profit margin of 4.7% and a stronger return on equity of more than 21%. SAIC has about $2 in debt for every $1 in cash and enjoys free cash flow of just under $200 million.

Notable Contract Wins

In the past month, SAIC has won three notable contracts. During the first week of April, it earned a five-year, $184 million software contract from the National Institutes of Health as well as a $140 million “IT modernization” contract from the U.S. Pension Guaranty Corp. Notably, it will share the second contract with CACI. During the second week of April, SAIC announced that it had secured a $228 million technology contract from Sandia National Laboratories. If these three payouts are fully realized, they could add up to $550 million to SAIC’s bottom line.

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