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Science Applications stock steady—UBS highlights defense exposure but lags in bookings

EditorEmilio Ghigini
Published 02/12/2024, 08:10 pm
SAIC
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On Monday, UBS began its coverage of Science Applications (NASDAQ: NASDAQ:SAIC) stock by assigning a Neutral rating and setting a price target of $134.00. The firm highlighted Science Applications' "bid more/win more" strategy, which resulted in a 16% year-over-year increase in the qualified pipeline during the second fiscal quarter.

UBS also noted the potential for the company to narrow its approximately 150 basis points EBITDA margin gap compared to its peers, and expressed a positive view on the company’s 52% Defense exposure.

The firm pointed out that Science Applications' last twelve months (LTM) book-to-bill ratio stands at 1.1X, which trails its peers. InvestingPro data reveals the company faces challenges with weak gross profit margins of 11.57% and short-term obligations exceeding liquid assets.

Additionally, concerns were raised regarding the forecasted 0.9X book-to-bill ratio for fiscal year 2024, which could potentially dampen revenue growth expectations.

UBS's stance is slightly more conservative than the consensus, with an anticipation of a 7% free cash flow per share (FCF/sh) compounding, as opposed to the 10% average for government IT.

The analyst from UBS remarked on the company's financial outlook, stating, "While LTM book to bill is 1.1X, that is below peers and the 0.9X FY24 book to bill may still weigh on revenue growth." The firm suggests that the current government environment may be more volatile, which advises caution. The recommendation from UBS is to wait for Science Applications to demonstrate further progress in bookings and margins before considering investment.

UBS's analysis indicates that while there are opportunities for Science Applications to improve and align more closely with industry standards, the present uncertainties in government spending and the company's performance metrics compared to peers warrant a neutral position at this time.

According to InvestingPro's Fair Value analysis, SAIC appears slightly undervalued at current levels. The platform offers 6 additional ProTips and a comprehensive Pro Research Report, providing deeper insights into SAIC's financial health and growth prospects. The target price reflects the firm's assessment of the company's value based on these factors.

In other recent news, Science Applications International Corporation (SAIC) has seen a flurry of noteworthy developments. The company's second fiscal quarter results showed a 2% increase in revenue and a slight 2% decrease in EBITDA, surpassing expectations. This led to a revised fiscal year 2025 forecast predicting 3% revenue growth and 4% EBITDA growth.

SAIC has also amended its existing credit agreement, effectively lowering the interest rates for certain loans, a move that could potentially lower borrowing costs for the company. In board news, SAIC recently appointed John K. Tien, Jr. to its Board of Directors. Tien, with a wealth of leadership experience from various sectors, will commence his term in December 2024.

Analysts from Wells Fargo (NYSE:WFC), JPMorgan (NYSE:JPM), and Jefferies have made adjustments to their outlook on SAIC. Wells Fargo increased the company's stock price target to $157, JPMorgan upgraded SAIC's stock from Neutral to Overweight and raised its price target to $170, while Jefferies increased SAIC's stock target from $140 to $148.

Additionally, SAIC secured a $229 million contract from the U.S. Department of Defense to enhance the IT capabilities of NORAD and USNORTHCOM. Lastly, SAIC and other manufacturers are facing new tariffs on Chinese-made electric vehicles imposed by the European Union. These are the recent developments that have shaped SAIC's current business landscape.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

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