Other Recent Moves
SAIC also recently announced that it would issue a special dividend of $1. The dividend is expected to be paid out in June to shareholders of record as of a yet-to-be-determined record date. Little more than two weeks after this announcement, SAIC’s stock hit a fresh one-year high. Relative to the company’s current share price of $13.90, a $1 special dividend would provide shareholders with a premium of 7.2% in addition to SAIC’s regular 3.5% yield.
The Battleground
SAIC competes with CACI International Inc (NYSE:CACI), an IT company that deals primarily with military contractors and departments. Like SAIC, CACI International Inc (NYSE:CACI) provides a number of high-tech surveillance and troubleshooting solutions for their clients. CACI is much smaller than its in-state rival, earning approximately $160 million on about $3.7 billion gross revenues in 2012. This produced a nearly identical profit margin of 4.3%. At 13.9%, its return on equity was slightly worse than SAIC’s. Although CACI has strong cash flow of almost $240 million, it has very little cash on hand and more than $730 million in debt.
SAIC also competes with ManTech (NASDAQ:MANT), an even smaller firm that also operates in the defense IT space. Financially, it is the weakest of the group, earning $95 million on about $2.6 billion gross revenues in 2012. This produced a profit margin of less than 4% compared to SAIC’s 4.7% and a return on equity of less than 9%. This ROE is much less than SAIC’s 21.8%. At $110 million, ManTech (NASDAQ:MANT)’s free cash flow is adequate. It has slightly less than $2 in debt for every $1 in cash on hand.
Long-Term Outlook: Good Contract Base, Heavy Dependence on Government Spending
Although SAIC is not exclusively dependent on defense spending for its revenue, its business model is certainly predicated on its ability to secure government contracts. Of course, this puts it in an uncertain long-term position. The U.S. government is widely expected to begin ratcheting down discretionary spending to control its mounting long-term debts, and military spending has already been significantly reduced by the across-the-board spending cuts known as the “sequester.” Indeed, SAIC’s stock fell sharply in February after it became clear that this program would go into effect.
However, this turned out to be a short-term buying opportunity. While SAIC has had trouble breaking above resistance around $14 per share, the company’s stock has gained more than 15% since the sequester’s onset.
Given SAIC’s apparent ability to win new contracts, it might not be in for too rough of a ride during the coming years. Investors who believe that the company can maintain its current pace may wish to buy in before the arrival of the special dividend. On the other hand, those who believe that the issuance of the special dividend marks a tacit admission that trouble lies ahead would do well to wait for a better entry point. Of course, all investors must conduct their own due diligence before making a decision.
The article Room to Run or Waiting for a Fall? originally appeared on Fool.com and is written by Mike Thiessen.
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