Shareholders of SAIC would probably like to forget the past six months even happened. The stock dropped 22.3% and now trades at $115.71. This might have investors contemplating their next move.
Is there a buying opportunity in SAIC, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free .
Why Do We Think SAIC Will Underperform?
Even with the cheaper entry price, we're sitting this one out for now. Here are three reasons why we avoid SAIC and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
Examining a company’s long-term performance can provide clues about its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Over the last five years, SAIC grew its sales at a tepid 3.2% compounded annual growth rate. This was below our standard for the business services sector.
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect SAIC’s revenue to rise by 2.7%. While this projection suggests its newer products and services will spur better top-line performance, it is still below the sector average.
3. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
SAIC historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 11.7%, somewhat low compared to the best business services companies that consistently pump out 25%+.
Final Judgment
We see the value of companies helping consumers, but in the case of SAIC, we’re out. Following the recent decline, the stock trades at 13× forward P/E (or $115.71 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better opportunities elsewhere. Let us point you toward the AmazonandPayPal of Latin America .
Stocks We Like More Than SAIC
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