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SAIC - Science Applications International Corporation


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Curious if anyone has looked at it or has any thoughts?


SAIC is a federal IT services company with long-term contracts, a sustainable and growing free cash flow profile, and that is nearing an inflection in revenue growth. In Jan. 2019, the Company completed the acquisition of Engility (all-stock), adding scale to its business, mixing towards higher margin cyber-security and intelligence work, and creating an opportunity to capture significant synergies ($75mm). In Feb. 2020, SAIC continued to increase its scale and growth profile with the acquisition of Unisys Federal, a US Federal IT services business focused on cloud infrastructure modernization that is immediately accretive to growth, margins and free cash flow, and further accelerates SAIC’s transformation. With these two acquisitions, SAIC becomes the #4 largest Fed. IT company with $7.4bn in revenue (pro forma FY20), enabling it to compete for and win much larger and a broader base of contracts. SAIC trades at a discount to peers, private market value, and its own historical valuation ranges largely as the organic topline growth has yet to materialize post-Engility - the last four quarters saw slightly declining organic revenue growth primarily due to dis-synergies from the Engility deal, while peers generally averaged around MSD organic revenue growth. This is despite management execution well ahead of expectations on margins and FCF and several significant contract wins beginning soon. LTM book/bill has been 1.2x and excludes nearly $1bn of IDIQ contracts as well as $3.5bn of total contract value not in backlog that as it was held up in protest, all of which were positively resolved in SAIC's favor over the past month at the same time as the market sold off due to coronavirus. As revenue inflects this year and management delevers while resuming their plan to aggressively return capital to shareholders in FY22, SAIC’s multiple should expand significantly. SAIC trades at an ~13% FY22 levered FCF yield compared with peers in a range of 4-7% and its own historical average of 7.5-8.0%.

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