Science Applications International: Still Attractively Rated, High Return Business

Core Viewpoint - The article discusses the potential economic slowdown in the US while highlighting the resilience of equity markets and the implications for companies with significant revenue exposure to the US, particularly focusing on Science Applications International Corporation (SAIC) as a potential investment opportunity due to its fundamentals and valuation [2][10]. Company Overview - SAIC reported Q1 FY 2025 revenues of $1.85 billion, reflecting a 9% year-over-year decline, attributed to its maturity cycle [5]. - The company has a forward earnings yield of 7% and a trailing free cash flow yield of 9% [2]. - SAIC's total contract value (TCV) wins of less than $500 million have remained stable, indicating a strong pipeline for future growth [5]. Financial Performance - The company maintained a book-to-bill ratio of 1.4, with approximately two-thirds of submission volume categorized as new business wins [5]. - Management retained its FY 2025 revenue guidance of $7.35 billion to $7.5 billion, projecting pre-tax earnings of $700 million at the upper end of the range [5]. - Free cash flow for the company has been robust, with historical figures showing cash generation between $700 million to $1.1 billion after accounting for growth and maintenance investments [30]. Industry Outlook - The consulting services market is projected to grow at a compound annual growth rate (CAGR) of 4.8%, reaching $447 billion by 2029, driven by demand for data analytics and AI integration [4]. - The research, promotional, and consulting services market is expected to grow at a CAGR of 5.3%, outpacing long-term GDP growth by approximately 300 basis points [4]. Competitive Advantage - SAIC has demonstrated a higher return on capital compared to industry averages, achieving a return of 12.2% against the industry average of 6.5% [13][42]. - The company operates with lower gross margins but maintains higher operating margins due to efficient cost management and pricing strategies [42]. Valuation - SAIC trades at a discount to the sector at 14.8x trailing earnings and 16x trailing EBIT, which are 24% and 7% discounts to the sector, respectively [22]. - Projected valuation indicates a potential upside to $156 per share, representing a 35% increase from the current price [23].