Foolish Forecast: What’s In Store for SAIC?

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President-elect Barack Obama's in the White House, and to hear people talk, it's a new day for the defense industry. How will this affect megadefense contractor SAIC (NYSE: SAI)? We get our first clue this afternoon, when SAIC reports its fiscal 2009 third-quarter numbers.

What analysts say:

• Buy, sell, or waffle? 15 analysts are feeling optimistic about SAIC, giving the stock eight buy ratings and seven holds.
• Revenues. On average, these analysts expect to see SAIC grow revenues 10% to $2.6 billion.
• Earnings. Profits are predicted to rise 11.5% to $0.29 per share.

What management says:
SAIC updated investors on its present status and future plans in an investor presentation in October. It's a pretty weighty document, but boils down to this: Management expects to earn $9.7 billion to $10 billion this year based on as much as 9% organic growth. It also anticipates earning operating margins between 7.7% and 7.8% on that revenue.

What management does:
Which poses investors a dilemma. SAIC says things are improving, but so far this year, we've seen little movement. Sure, SAIC is still earning better operating margins than rivals like CACI (NYSE: CAI) or Computer Sciences (NYSE: CSC), but it's lagging most of the big-name defense contractors -- firms like L-3 (NYSE: LLL) and Lockheed (NYSE: LMT) -- in this regard. Year to date, SAIC's operating margins have only slightly improved against fiscal H1 2008, meaning that if it's to hit its targets, it's got little room for error -- literally all of the improvement must appear in H2, or not appear at all.

Margins	4/07	7/07	10/07	1/08	4/08	7/08
Gross	13.3%	13.3%	13.6%	13.8%	13.9%	13.8%
Operating	7.0%	7.0%	7.3%	7.5%	7.6%	7.5%
Net	4.5%	4.7%	4.6%	4.7%	4.7%	4.3%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

One Fool says:
Regardless of whether SAIC pulls a rabbit out of its hat tomorrow, though, it behooves a long-term-thinking Fool to keep in mind what SAIC plans farther down the road. Here, too, SAIC told us a few things in October. For example, SAIC aims to improve margins at least in part by exiting "non-core commodity/low margin businesses." (So, don't be alarmed if revenues don't grow sprightly. This could be intentional, as SAIC trades out of low-margin work for more profitable endeavors.)

Among these new ventures, expect to see SAIC move eagerly into the four fields it believes have top prospects for growth: Energy management -- such as the help it's giving BP (NYSE: BP) in oil recovery, or General Motors (NYSE: GM) in building "more energy-efficient facilities." SAIC will also be increasing its focus on managing health data records, cargo security inspections, and cyber security as well.

Now you know where to look for improvements. Just a few words to the Foolish.

You've read what Rich thinks. But do the folks at Motley Fool Inside Value agree? Sign up for a free trial subscription to Inside Value now, and find out.