No More Secrets at SAIC

SAIC (NYSE: SAI  ) is one of the largest service and solutions providers to U.S. military and related government agencies. After nearly 40 years as a privately held entity, it issued shares to the public in October. So why would a firm that makes a living off of secret intelligence want to enter the public realm, and does that spell opportunity for investors?

It's hard to tell at this point in time. SAIC just went public, so it's difficult to discern its per share cash flow generating capabilities. For starters, based off of management guidance for fiscal 2007 and expectations for 365 million shares outstanding, the stock is trading at about 19 times earnings. But due to the public offering, share count for 2008 is projected to jump to 430 million, accounting for the per share drop in earnings and a forward P/E of almost 22.

Another thing to consider is that employees who received shares in the public offering are currently prohibited from selling their holdings. That will change quickly as some 140 million shares are set to be "unlocked" in January. Wide-scale selling is not expected but certain shareholders will undoubtedly look to cash out. This could put pressure on the stock price.

SAIC's motivation for going public was to raise proceeds as employee owners were increasingly selling shares accumulated over the years. SAIC would gladly buy back the shares but the higher volume was quickly depleting company capital. Employees and other owners from the old SAIC will also soon be receiving $2.45 billion in a special dividend. As a result, the $3.6 billion in cash on the balance sheet will fall to $1.2 billion or so after the payment is made.

Once the moving parts fall into place from the share offering, SAIC will be worth keeping an eye on. Its business is unique, as the Department of Homeland Security, U.S. military, and other government divisions trust it with solving the technical implications that go with ensuring national security. In fact, certain employees are granted high-level security clearance, so don't expect competitors to steal business frequently, if at all.

As a service company, SAIC throws off decent annual cash flow and has low levels of capital expenditures to sustain the business. It's also much larger than government service peers such as CACI (NYSE: CAI  ) , ManTech International (Nasdaq: MANT  ) , and SRA International (NYSE: SRX  ) . Right now, cash is being expended to pay the special dividend, but going forward management intends to use capital by making acquisitions to grow market share. The company hasn't grown that rapidly as of late so it will be interesting to see if a publicly traded currency will help reignite a steady historical acquisition binge. It may already have; for the just-completed third quarter, management made three purchases for $114 million.

SAIC has a solid track record of providing sensitive services to defense and military arms of the U.S. government which have experienced a renaissance as homeland security initiatives have moved to the forefront of the national agenda. Investors are hoping that the company continues its secret operating strategies but quickly develops a reputation as a steady, growing performer in the public eyes of Wall Street.

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Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.


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