SAIC Surprises

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SAIC (NYSE: SAI) shareholders received a double dose of good news over the past 24 hours. Their company first reported that it beat revenue and earnings estimates and offered strong guidance -- and soon thereafter, it earned an upgrade to "buy" from stock shop Jesup & Lamont.

Before I progress, allow me to digress
Ordinarily, I wouldn't even mention the upgrade. As we've shown time and again with data from Motley Fool CAPS, Wall Street analysts by and large aren't any better than the rest of us at picking stocks. But J&L appears to be an exception, so before I get to the actual "news" part of this column, allow me to highlight J&L's history of getting 64% of its picks right -- and its special skill in analyzing government contractors. In addition to SAIC, the analyst has recommended buying shares of both rivals CACI (NYSE: CAI) and ManTech (Nasdaq: MANT), and it has outperformed the market by double digits in each case.

And now for the news
Will J&L be as fortunate with this morning's upgrade? Early indications look good. SAIC walloped analyst expectations in the fiscal first quarter of 2009 and grew its revenue 18% to nearly $2.4 billion. The company's earnings per share from continuing operations rose more than twice as much -- up 39% to $0.25 per share.

What's more, the good times seem set to continue. SAIC reported that its backlog increased 5% in comparison with this time last year. That means sales should keep growing, and combined with now-predicted operating margin expansion of 20 to 30 basis points for the year, profits should grow as well. When it comes to profit margins, SAIC still can't touch IBM (NYSE: IBM), L-3 (NYSE: LLL), Lockheed (NYSE: LMT), or Accenture (NYSE: ACN) -- but it's closing the gap.

And now for the commentary
Even better than the GAAP news was that SAIC addressed my primary criticism head-on. In our pre-earnings Foolish Forecast, I highlighted a dramatic decline in free cash flow last year as contrasting with SAIC's fiscal 2007 performance. But SAIC is already making progress in reversing that trend.

At first glance, free cash flow of just $1 million in Q1 may fail to impress. But consider that a year ago, SAIC was reporting that it had burned through $146 million in cash. That's a net improvement of $147 million, and it brings the company to $428 million in cash profit generated over the past 12 months.

Foolish takeaway
Mind you, the stock still trades for more than 19 times trailing free cash flow, and analysts forecast less than 14% annual long-term growth. To my mind, SAIC is still not yet a "buy" -- but it's moving in the right direction. Keep a sharp eye out for unjustified drops in price. We may get a buying opportunity yet.