After A Mixed Q1 Print, Drexel Hamilton Says SAIC Shares Are Fairly Valued

Science Applications International Corp (NYSE: SAIC) reported Tuesday after the close with above-consensus first-quarter revenue and adjusted earnings per share. 

The Analyst

Drexel Hamilton analyst Brian Ruttenbur downgraded SAIC from Buy to Hold. 

The Thesis

SAIC's Q1 book-to-bill ratio was at a weak 8 times, and the guidance for fiscal 2019 is in line with its long-term growth plans for low-single digit revenue growth and 10-20-basis point margin expansion, Ruttenbur said in a Wednesday note.

The analyst characterized the Q1 results as mixed given "weak" bookings and an EBITDA figure that arrived $8 million below Drexel Hamilton's estimate. 

The sell-side firm lowered its fiscal 2019 revenue estimate from $4.6 billion to $4.5 billion and its adjusted EPS estimate from $4.33 to $4.25. Ruttenbur maintained the 2020 revenue estimate at $4.7 billion, but lowered the adjusted 2020 EPS estimate from $4.76 to $4.66.

SAIC's free cash flow projection of $250 million for fiscal 2019 and beyond is solid, the analyst said. 

SAIC shares trade at 14.6 times its FY19 EV/EBITDA guidance, a premium to the peer average of 12 times, Ruttenbur said. 

"We believe shares of SAIC should trade at a premium to its peers due to the company's above peer growth," the analyst said. 

"However, at current levels, we believe shares of SAIC are fairly valued."

The Price Action

SAIC shares were plunging 6.6 percent to $82.27 at the time of publication Wednesday morning. 

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