Since falling off the earnings-outperformance horse last summer, SAIC (NYSE:SAI) has been riding high, easily clearing the next three earnings hurdles and closing out fiscal 2008 with a bang. But as is its wont, the earnings merry-go-round has revolved, bringing us back to the beginning of a new year. Let's hope this one starts off better than the last one did, as SAIC reports its fiscal Q1 2009 numbers on Tuesday.
What analysts say:
- Buy, sell, or waffle? Seventeen analysts follow SAIC. Four of them think it's a buy; the remaining baker's dozen all vote "hold."
- Revenue. On average, the analysts expect to see 9% revenue growth to $2.26 billion.
- Earnings. Profits are predicted to rise 22% to $0.22 per share.
What management says:
According to CEO Ken Dahlberg, SAIC "is stronger than ever." Commenting on results at the tail end of last fiscal year, he crowed over "accelerated revenue growth [and] significantly expanded ... operating margins."
What management does:
Yet while writing up the earnings report that so pleased Dahlberg back in March, I found myself less thrilled with the numbers than Dahlberg was. Take the "accelerated revenue growth," for example. It only added up to 11% growth in Q4, and more than a third of that came from acquisitions.
Operating margins certainly did "expand." But does 40 basis points qualify as "significant"? Maybe for a company building on an operating margin base as weak as SAIC's. But I find it hard to imagine a SAIC rival like IBM (NYSE:IBM), L-3 (NYSE:LLL), or Lockheed (NYSE:LMT) bragging about 7.5% operating margins. They all still beat SAIC handily in the operating-margin race. Honestly, I can see SAIC's performance evoking jealousy only at similar second-tier-in-profitability contractors like CACI (NYSE:CAI) or Computer Sciences (NYSE:CSC).
|
10/06 |
1/07 |
4/07 |
7/07 |
10/07 |
1/08 | |
|---|---|---|---|---|---|---|
|
Gross |
13.6% |
13.5% |
13.2% |
13.2% |
13.5% |
13.8% |
|
Operating |
6.8% |
7.1% |
6.9% |
7.0% |
7.3% |
7.5% |
|
Net |
5.8% |
4.9% |
4.3% |
4.6% |
4.5% |
4.6% |
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.
One Fool says:
Of course, what really worries me about SAIC is not its GAAP results, but its free cash flow, which plummeted 54% in fiscal 2008, as compared to fiscal 2007.
When I last wrote about the company, post-earnings, I pointed out that at this level, SAIC was selling for 27 times its trailing free cash flow. But with the stock having risen 10% in price since then, it's now commanding a 29-times multiple to free cash flow. To me, that's too rich a price for 14% expected growth.
Listen, I know SAIC is a Motley Fool Inside Value recommendation and all. And I truly wish the company and its investors nothing but the best. But unless SAIC shows a remarkable turnaround in cash profitability this year -- and starts showing it next week -- I just don't think I'll be able to call this thing anything but a "sell on valuation" stock.
