It has been about a month since the last earnings report for SAIC (SAIC - Free Report) . Shares have lost about 5.4% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is SAIC due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Science Applications Surpasses Q2 Earnings Estimates
Science Applications reported solid second-quarter fiscal 2019 earnings of $1.13 per share, which beat the Zacks Consensus Estimate of 98 cents and increased 41% year over year.
Moreover, revenues jumped 3.4% from the year-ago quarter to $1.115 billion and beat the Zacks Consensus Estimate of $1.105 billion.
The increase in top line was driven by higher number of orders in the company’s supply chain, which contributed $31 million to total revenues. Also, and new contracts involving NASA and other government agencies brought in $24 million.
Quarter in Details
Net bookings for the quarter were approximately $1.5 billion as a result of contract award activities, reflecting a book-to-bill ratio of approximately 1.4 in the quarter. At the end of the quarter, Science Applications’ estimated backlog of signed business orders was approximately $10.5 billion, including $2.1 billion of funds.
Total backlog was up 5% and funded backlog increased 5% sequentially.
Notably, the company won several Expand Awards during the quarter from the U.S. Space Related Activities and the U.S. Navy. It also secured Protect Awards from the The U.S. Army Aviation and Missile Command, The U.S. Army and the General Services Administration, The U.S. Navy Space and Naval Warfare, the General Services Administration and the U.S. Navy. It also received a notable Grow Award from the Navy.
In the fiscal second quarter, Science Applications announced its impending equity-based acquisition of Engility, worth $2.5 billion. The company expects the combined forces of the two leading government services providers to bolster its position in the industry as well as strengthen its long-term growth strategies. With last 12 months’ revenues of approximately $6.5 billion pro forma, the company reached the second position among its peers.
Adjusted Operating margin expanded -90 basis points (bps) to 6.6% in the reported quarter. Adjusted EBITDA margin increased 80 bps on a year-over-year basis to 7.5%.
The year-over-year increase in profits was primarily due to improved performance across the company’s portfolio and continued cost restructuring efforts.
Balance Sheet & Cash Flow
Science Applications ended the quarter with cash and cash equivalents of $106 million, down from $152 million reported in the previous quarter.
Operating cash outflow was $12 million and free cash outflow was $24 million, primarily owing to delayed collections due to government payment system issues, which took place last year. An increase in investment in platform integration programs affected the cash flow. The company had delivered operating cash flow and free cash flow of $88 million and $82 million, respectively, in the previous quarter.
Science Applications spent $13 million in cash dividends and $9 million in term loan repayment. No share repurchases were made during the quarter because the company focused on other capital deployment opportunities, which include the pending Engility acquisition.
Science Applications reiterated its full-fiscal 2019 guidance.
It continues to expect growth in revenues, and anticipates EBITDA margin to increase 20-40 bps from 7% recorded in fiscal 2018. Free cash flow is expected to be around $250 million in fiscal 2019.
The company expects annual gross savings of approximately $150 million, or 2.3% of combined revenues post the acquisition of Engility.
Net cost synergies are projected to be $75 million as a result of the acquisition.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates.
At this time, SAIC has a subpar Growth Score of D, however its Momentum Score is doing a bit better with a C. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions looks promising. Notably, SAIC has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.