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Buy, Sell or Hold: SAIC's Two-for-One Sale

SAIC, Inc. (NYSE:SAI), the 7th largest government contractor, primarily provides both national and cyber security to the federal government. The company also implements and runs complex software and technological solutions for the health care and energy industries.

SAIC has a market capitalization of over $5 billion and has more than 38,000 employees. Its clientele includes the Department of Defense, Homeland Security and rest of the intelligence community.

These previously free-spending customers are under pressure to lower expenditures due to issues surrounding budget sequestration. But, even with the sequestration issue at the forefront, SAIC is managing to thrive.

Before outlining the particulars of SAIC as a business, there is one caveat to be aware of in terms of overarching current events.

Let me be clear that the security of our country's technological resources and military secrets is a necessity in these troubling times, where state-sponsored hackers are likely on the prowl in North Korea and China.

However, the extent that SAIC is involved in any "Edward Snowden-type" revelations is unclear. Couple that with the fact that SAIC is involved in the implementation of Obamacare, and it has me wondering how much of my personal data is a state secret, rather than my secret.

So, if profits are your motivation, and you can look beyond any potential overreaching by the company, SAIC is an investment opportunity worth considering. 

(If you are craving the politics of governmental surveillance and security, check out this recent Money Morning debate on Edward Snowden.)

SAIC to Split into TWO Companies

Many times when a company decides to split, it does so because one part of the business is dragging down earnings of other, more successful divisions. 
The theory is, if left to fly on its own, the lesser company has a better chance of survival.

It's also worth noting that the lesser company oftentimes takes the lion's share of the company's debt with it.

However, this is not the case with SAIC.  The goal here is to create two separate, but equal, companies.

Shareholders will soon be in possession of shares in the "new SAIC."

The new SAIC will focus on enterprise IT, government technical services, and shares in "Leidos." It will concentrate on federal and commercial solutions in national security, engineering, and health care markets. 

The date for the split has yet to be announced, but it could be as early as this month.

SAIC described its motivation for the split: "We have approached this separation as if SAIC was being separated into twins: two unique, dynamic, strong and capable companies trading ideas, working in collaboration and partnership, yet recognizing that the duality of the different business models within SAIC needed to be separated.

"There was no primary and secondary, retain or divest, or right or wrong," it stated. "But instead, two equals, twins from the same parent, SAIC."

You may be asking, why mess with a good thing?  After all, in the most recent quarter the company exceeded analysts' estimates with revenues of $2.71 billion compared to the year-ago quarter of $2.76 billion.

Keep in mind, the revenues still kept flowing in at a good clip in spite of the cutbacks from the U.S. government and the winding-up of certain government contracts.

The reason for the split is unique in its design. It will allow the two separate companies to service the same client in different capacities. Often, SAIC would run into organizational conflicts of interest when dealing with a client.

For example, SAIC's Electronic Warfare division was involved in establishing requirements and evaluating equipment for the U.S. government. In that capacity, it was prohibited from providing the actual service – instead those lucrative contracts were being awarded to competitors.

SAIC believes that the split will unlock shareholder value to the tune of $63 billion of new revenue over the next five years.

So, even with sequestration being the major sticking point to SAIC's future prospects, the company has thus far performed remarkably well.

And now there is great optimism that the two new companies will take advantage of previously unexplored opportunities.

Two of President Obama's Favorite Expenditures

There is no end in sight to Washington's free-wheeling, money-spending ways, despite minor blips like sequestration. As sad as it sounds, once we've come to terms with it, how can we best put ourselves in a position to capitalize on this one-way ticket to government insolvency?

As the old saying goes – "Don't fight the FED." The same idea can be applied to Washington.

Why not invest in the same things the government is spending (or wasting) money on – Defense and Obamacare?

After much debate on the floor of the U.S. House on July 24, it approved the 2014 defense appropriations bill that will give the Pentagon about $600 billion next year to spend on cyber security, surveillance, drones and all the other mechanisms that keep the war machine humming along.

This is good news for SAIC, which will no doubt get its share of this big pie once the bill gets the President's signature.

SAIC's Health and Engineering Division also will benefit from increasing healthcare spending, which is highly correlated with the implementation of Obamacare.

In fact, this division was largely responsible for SAIC's respectable quarterly earnings as it saw an increase of 25% ($105 million) in revenues compared to the same quarter a year ago.  

This revenue growth was primarily due to last year's acquisition of maxIT Healthcare Holdings, Inc., which is a leading provider of healthcare IT consulting services to commercial clients.

With this acquisition, SAIC realizes that the healthcare industry is becoming ever more important to its future growth as it is not directly related to the government contracts. The company posted an internal growth rate of 9% for this business driven by the requirement for compliance with Obamacare, the shift to electronic health records, security of data and consulting services.

Buy this TWO for One Deal

SAIC shareholders had a bit of a scare in May as the company's stock dipped from its yearly highs. However, since then it has completely recovered and is now up approximately 30% year-to-date.

Technically speaking, the company fell to its 200-day moving average and has rebounded and pushed through its 50-day moving average where it is currently making new yearly highs. All this occurred within the space of a few dramatic weeks.

Source: Yahoo Finance

Usually a move like this means that investors would best be served by slowly building a position over time and using dollar cost averaging to their advantage.

However, with the upcoming split, I believe there are some players who are just now waking up to the idea of this newly unlocked shareholder value and are driving the share price higher.

Unfortunately, I am one of those "waking up" as well and have to slap myself for not being on top of this earlier.  That still doesn't preclude me from being a BUYER here (at these prices) with the proper stops in place.

Just a note – if you have qualms about purchasing SAIC for political reasons or a belief that defense spending will continue to slow, you can always take advantage of the split scenario and sell the "new SAIC" shares while holding on to your shares of Leidos for the longer term.

David also takes a look at the prospects of one of the leading cloud computing companies in the country. Read here.

[Editor's Note: If you have a stock you would like to see us analyze in a future issue, leave us a note in the comments below and we'll add it to our list.]

About the Author: David Mamos brings nearly 15 years of analytical experience to the table with a background ranging from big-picture fundamental analysis to highly technical trading decisions. He began his career working as a financial advisor with Royal Alliance in 2001 and helped clients with portfolio management as well as buy-sell decisions before transitioning to the development, implementation and execution of trading strategies for aggressive investors.

Join the conversation. Click here to jump to comments…

  1. 000065216827 | December 10, 2013

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  2. jos | February 9, 2014

    good article

  3. hemant | November 13, 2014

    oil rate up and down. pls. show.

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