SAIC Shares Downgraded By Cowen As Valuation Approaches Parity

Review Of Q2

"Q2 continued SAIC's record of impressive performance; but up a peer-high 20 percent since midyear, the stock sells for an above-avg 11.7x C17 EV/EBITDA and looks less compelling than peers Leidos Holdings, Inc. LDOS & Booz Allen Hamilton Holding Corporation BAH," analyst Cai von Rumohr wrote in a note.

The company's second-quarter adjusted EPS of $0.85 beat consensus by $0.06 and Cowen's estimate by $0.05 on higher op income and lower interest. Revenues of $1.095 billion were in line.

Estimates, Valuation And Expectations

Following strong second quarter, von Rumohr raised FY17 adjusted EPS view by $0.03 to $3.33 and set FY18 EPS estimate at $3.75. The analyst also expects SAIC to raise its dividend at next week's board meeting, speculating the bump to come in at $1.36/ share (+10 percent).

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"But with an est. $400+ million in free cash flow through year-end FY18, and no near term debt paydown under the new debt agreement, SAIC can both boost cash to its $150 million target and have ~$250 million in firepower for additional deployment," von Rumohr noted.

The analyst, who assumes the company uses about $190 million for share repurchase, has raised the price target to $71 from $64. The new price target represents 11.8x EV/EBITDA.

Despite SAIC boasting an 8 percent FY18 cash flow yield, Rumohr prefers Leidos and Booz Allen. The analyst highlighted Leidos' more dynamic market positions and modest 9.2x EV/EBITDA, while noting sector leader Booz Allen has "a richer technology/market mix [...] consistent bid win record and a lower 11.0x EV/EBITDA."

Shares of SAIC closed Thursday's regular trading at $69.65. In the pre-market hours Friday, the stock is down 1.39 percent to $68.68, and within the first hour of regular trading, the stock was seen at $68.48, down 1.68 percent.

Full ratings data available on Benzinga Pro.