Summer 2014 Called; Wants Its Levels Back from SAIC

• Science Applications International Corp SAIC shares plunged nearly 13 percent on September 1 after the company reported F2Q16 results.
• Citi’s Jonathan Raviv upgraded the rating on the company from Neutral to Buy, while maintaining a price target of $55.
• The pullback in shares offers a good opportunity, Raviv said, citing the company’s margin, cash deployment and valuation potential.

Analyst Jonathan Raviv pointed out that Science Applications’ shares are currently trading at the summer 2014 levels, despite the company having stabilized its sales, made a cash accretive acquisition and won programs ramping next year.

The company reported F2Q16 adjusted EBITDA margin of 7.5 percent, ahead of the Citi estimate by 50bps, driven by a strong underlying performance. “Although SAIC suggests F2H pressure since positive contract adjustments don’t repeat, the F2Q result suggests upside potential beyond company’s suggestion of ~7% this year growing 10-20 bps annually thereafter,” Raviv wrote.

Although the results do not reflect a turnaround, the strong margins in the quarter set a higher base, the analysts noted.

Science Applications’ shares dipped 8 percent in late March, after the management announced plans to hold off on repo until de-levered from Scitor. On the Analyst Day, the company’s CFO indicated that they are “not racing to de-lever” and that they “have deployment decisions to make near-term due to expectations of excess cash vs. their $150m min. operating need,” the Citi report stated.

Raviv expects an early resumption of regular repo and believes that the company could also choose to ramp internal investment to pursue and win more business.