Science Applications International Corp. (SAIC - Free Report) has recently received a $165 million information technology (IT) contract from the Commonwealth of Virginia to serve as a multisourcing service integrator (MSI).
Per the contract, Science Applications will be assisting Virginia Information Technologies Agency (VITA) in modernizing the state’s IT infrastructure.
VITA is a provider of consolidated technology services and solutions for the commonwealth and it is in charge of all technology related operations of the state including procuring products and services and supervision of major IT projects.
This award has a five-year base period and two 2-year options, which add up to a potential value of $272 million, if all options are exercised.
The contract entrusts Science Applications with the responsibility of monitoring the state executive branch agencies’ IT infrastructure services suppliers. This will also involve diversification of the state’s suppliers’ portfolio and improvement of the quality of service delivery. It will also look into cost effectiveness and provide a transparent view of the entire service delivery platform.
Frequent Contract Wins by SAIC: A Boon or a Bane?
Notably, Science Applications has been steadily winning contracts from the federal government, but these low-margin deals have affected the company’s profitability.
In the recently reported fiscal second-quarter 2018, the company won a contract worth $621 million (if all options are exercised) from the General Services Administration (GSA) Federal Systems Integration and Management Center (FEDSIM). Moreover, the GSA, on behalf of the Army Software Engineering Directorate (SED), awarded another contract worth $404 million (if all options are exercised).
Science Applications also won contracts from the National Aeronautics and Space Administration (NASA) GSFC Omnibus Multidisciplinary Engineering Services, U.S. Navy - Space and Naval Warfare Systems Command (SPAWAR), NASA Joint Operations, and National Institute of Mental Health.
These contracts ensure recurring revenues but adjusted operating income margin contracted 120 basis points (bps) to 5.5% in the reported quarter. The deals with the federal civilian bodies and re-competed supply chain management contracts weigh the most on margins. Also, an increase in cost reimbursement type contracts compared with fixed price contracts are a headwind.
Nevertheless, we believe that the frequent government deals have increased the company’s prominence in the market and have positively impacted its top line.
Zacks Rank and Key Picks
Science Applications currently has a Zacks Rank #4 (Sell).
Better ranked stocks in the broader technology sphere include Applied Materials, Inc. (AMAT - Free Report) , Lam Research Corp. (LRCX - Free Report) and Micron Technology, Inc. (MU - Free Report) , all sporting a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
The long-term earnings growth rate for Applied Materials, Lam Research and Micron are projected at 17.1%, 17.2% and 10% respectively.
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