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SAIC Wins Contract from USDA for Conservation-Based Programs

Science Applications International Corp. SAIC recently announced that it has been awarded a deal by the United States Department of Agriculture (USDA).

The contract entrusts the company with the responsibility of developing web applications and providing maintenance services to the Farm Service Agency (FSA). This end-to-end support service will be per the FSA-administered conservation-related programs that include Conservation Reserve Program.

This award has a base performance period of one year and four one-year options. Pertaining to the fact that all the options are exercised, the contract has a valuation of $43 million. The primary performance is to be based out of Kansas City, MO.

Per the terms of the contract, SAIC will provide the requisite operations related to Application Assessment and Authorization and Disaster Recovery services for the conservation programs supported by USDA FSA, which include preservation of wildlife habitat, reduction of soil erosion and protection of drinking water.

SAIC’s Bottom Line Disappoints

SAIC stock has gained 2% year to date, underperforming the 40.7% rally of the industry it belongs to.

We note that though SAIC has won quite a few federal contracts, the low-margin deals have adversely impacted the profitability of the company. This has been reflected in investor confidence to an extent as evident from its share price performance.

Its continuous support to federal civilian agencies and re-competed supply chain management contracts are the primary reasons for the EBITDA margin contraction of 130 basis points (bps) on a year-over-year basis to 6.5% in fiscal second-quarter 2018. Adjusted operating income margin contracted 120 bps to 5.5% in the same period.

Recent Contract Wins and Partnerships

Nevertheless, we believe the frequent contract wins will be beneficial for the company’s top line going forward.

Some its latest deals include the $250 million blanket purchase agreement with the USDA for providing enterprise level security support and architecture services. Prior to that, SAIC received a $165 million information technology (IT) contract from the Commonwealth of Virginia to serve as a multisourcing service integrator (MSI).

Notably, the company’s recent partnership with ST Kinetics and CMI Defence for the development of prototypes of combat vehicles to compete for an Engineering and Manufacturing Development (EMD) contract is another positive. If SAIC manages to win this contract, it will boost its top line.

Zacks Rank & Key Picks

SAIC currently has a Zacks Rank #5 (Strong Sell).

Better-ranked stocks in the broader technology space include Applied Materials, Inc. AMAT, Micron Technology, Inc. MU and Yelp Inc. YELP, all sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The long-term earnings growth rate for Applied Materials, Micron and Yelp is projected to be 17.1%, 10% and 28.7%, respectively.

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