Shift In Procurement Trends Will Benefit Mission-Critical Enterprise IT

Key Takeaways

• SAIC's focus on mission-critical technology and fixed-price contracts may improve revenue and profit margins.
  
• Strategic growth through commercial sector expansion and focused capital deployment, including buybacks and M&A, supports earnings potential.
  
• Shifts in government procurement and contract types pose risks to SAIC's revenue and growth, necessitating careful cost management and program performance.

Catalysts

Engages in the provision of technical, engineering, and enterprise information technology (IT) services in the United States.

• SAIC is focusing on mission-critical, enterprise IT, and technology benefits from shifts in procurement emphasizing these areas, which may boost revenue and margins.
  
• The anticipated transition of more contracts from cost-plus to fixed-price could improve margins by aligning with the contracts' nature and improving profitability over time.
  
• The increase in commercial sector revenue, particularly through DevSecOps, shows strong growth potential; targeting $100 million by FY '28 could support earnings with consistent healthy margins.
  
• Expanding the pipeline and improving win rates in strategic areas with higher implied margins should drive both revenue and margin growth over time.
  
• A focused capital deployment strategy including share buybacks and capability-focused M&A could enhance earnings per share through reduced share count and strategic growth initiatives.

Science Applications International Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Science Applications International's revenue will grow by 2.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.8% today to 5.0% in 3 years time.
• Analysts expect earnings to reach $407.6 million (and earnings per share of $9.69) by about March 2028, up from $362.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.8x on those 2028 earnings, down from 15.0x today. This future PE is lower than the current PE for the US Professional Services industry at 21.7x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.4%, as per the Simply Wall St company report.

Science Applications International Future Earnings Per Share Growth

Risks

• The evolving procurement environment with an emphasis on mission-criticality and the infusion of cutting-edge technology may pose challenges for SAIC, as changes could impact how they secure contracts and influence revenue and profit margins.
  
• The ongoing uncertainty related to government efficiency initiatives, including procurement delays and potential budget reallocations, presents a risk that could affect SAIC's future revenues and earnings growth.
  
• Unforeseen changes in government priorities, such as shifts in defense spending or alterations in funding for civilian agencies, could negatively impact SAIC’s revenue streams and growth trajectory.
  
• The gradual transition from cost-plus to fixed-price contracts might expose SAIC to revenue fluctuations and require strict cost management to maintain or improve net margins.
  
• Recompete headwinds and the potential for continued delays in contract awards or renewals could pose risks to revenue stability and growth, requiring SAIC to manage program performance meticulously to protect earnings.

Valuation

• The analysts have a consensus price target of $127.8 for Science Applications International based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $155.0, and the most bearish reporting a price target of just $101.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $8.1 billion, earnings will come to $407.6 million, and it would be trading on a PE ratio of 14.8x, assuming you use a discount rate of 7.4%.
  
• Given the current share price of $113.44, the analyst price target of $127.8 is 11.2% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.