According to CEO Ken Dahlberg, government contractor SAIC (NYSE: SAI ) "is off to a good start for the year." Shareholders who've seen the value of their investment drop 8% since Wednesday's fiscal Q1 2008 earnings news may feel differently.
If they do, you can't really blame them. In a world where double-digit growth has become de rigueur for many investors, SAIC's 6% increase in sales year over year probably doesn't pass muster. Especially when you consider that only two percentage points of that growth was organic, with twice as much growth deriving from acquisitions. Moreover, where the firm did get double digits -- earnings from continuing operations -- it headed in the wrong direction, dropping 33% year over year to $0.18 per share.
Uneaten cake
Then again, investors who aren't also employees of SAIC can't really complain too much about the drop in earnings per share. That would evoke references to "having your cake and eating it too." Only half the decline in per-share earnings came from weakness at the business per se (a 50-basis-point drop in operating margins to 6.8%, reduced further at the net margin level by higher taxes). The rest of the decline was a function of the very event that permitted non-employee investors to buy into SAIC in the first place -- the IPO.
You see, when SAIC "went public" last year, it issued new shares to the ... public. This increased the share count by 20%, which increased the number of slices among which the firm's total profits got divided. Although SAIC subsequently reversed some of the dilution by buying back 5.2 million shares last quarter, in the end, the IPO in and of itself reduced earnings per share by another 17% or so.
Plenty of cake left over
So the bad news wasn't quite as bad as it appeared at first glance. Was there any good news as well? Turns out there was. For one thing, the reduced margins still sit higher than those of rivals DynCorp (NYSE: DCP ) and Computer Sciences (NYSE: CSC ) (if far below those of Lockheed Martin (NYSE: LMT ) and L-3 (NYSE: LLL ) ). For another, management dismissed the reduced operating margin as a function of increased R&D spending (an investment in future profitability) and "the timing of business development."
In other words, SAIC says investors should not worry about one quarter's results, but focus on the long term instead. Speaking of which, it says plans remain on track to hit its previous guidance for this year: $8.7 billion to $9 billion in sales, and $0.83 to $0.88 per share in earnings.
Want to learn more about SAIC? Get the word straight from the horse's mouth (no offense intended) -- the Fool's own Alex Dumortier interviewed Titan (now L-3 (NYSE: LLL ) alum and current SAIC CFO Mark Sopp early last month. You can read the complete interview for free when you sign up for a free trial subscription to Motley Fool Inside Value.
Fool contributor Rich Smith does not own shares of any company named above. SAIC is an Inside Value pick. The Fool has a disclosure policy.
RSS Headlines
Fool UK