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Science Applications & Partners to Build Combat Vehicle Model

Zacks

Science Applications International Corp. SAIC recently announced that it has partnered with ST Kinetics and CMI Defence for the development of prototypes of combat vehicles.

The partnership will enable Science Applications to compete for an Engineering and Manufacturing Development (EMD) contract that requires a lightweight, mobile and lethal combat vehicle. The company plans to develop the requisite vehicle combining ST Kinetics’ Next Generation Armored Fighting Vehicle (NGAFV) and CMI Defence’s Cockerill Series 3105 turret, which is currently in production.

The vehicle will be in compliance with the specifications of the U.S. Army per the Mobile Protected Firepower (MPF) program. We believe that if Science Applications manages to win this contract, it will be another feather in its cap.

The stock has gained 1.5% year to date, underperforming the 39.7% rally of the industry it belongs to.


Recent Deal Wins

Science Applications’ frequent contract wins is expected to benefit top-line going forward.

In September, the company was awarded a $250 million blanket purchase agreement by the U.S. Department of Agriculture (USDA) for providing enterprise level security support and architecture services.

Prior to that, Science Applications received a $165 million information technology (IT) contract from the Commonwealth of Virginia to serve as a multisourcing service integrator (MSI). In the last quarter (second-quarter fiscal 2018), the company won a contract worth $621 million (if all options are exercised) from the General Services Administration (GSA) Federal Systems Integration and Management Center (FEDSIM). Moreover, the GSA, on behalf of the Army Software Engineering Directorate (SED), awarded another contract worth $404 million (if all options are exercised).

The company also won contracts from the National Aeronautics and Space Administration (NASA) GSFC Omnibus Multidisciplinary Engineering Services, U.S. Navy – Space and Naval Warfare Systems Command (SPAWAR), NASA Joint Operations, and National Institute of Mental Health.

Low-Margin Contracts Hurting Profitability

However, we note that these low-margin deals are negatively impacting the company’s bottom line.

Adjusted EBITDA margin contracted 130 basis points (bps) on a year-over-year basis to 6.5% in the last reported quarter. Adjusted operating income margin contracted 120 bps to 5.5% in the same period.

These declines were primarily attributed to programs supporting federal civilian agencies, lower profitability on re-competed supply chain management contracts and higher severance and facility expense.

Zacks Rank and Key Picks

Science Applications 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 Guidewire Software, Inc. GWRE, 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 Technology and Guidewire Software is projected to be 17.1%, 10% and 14.6%, respectively.

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