Science Applications (SAIC) Q3 Earnings: What's In Store?

Science Applications International Corporation (NYSE:SAIC) will report fiscal third-quarter 2018 earnings on Dec 7 after the bell.

Notably, the company’s earnings have beaten the Zacks Consensus Estimate in two of the four trailing quarters, with an average positive surprise of 3.22%.

Last quarter, the company delivered a negative earnings surprise of 2.20%. SAIC reported fiscal second-quarter 2018 earnings of 80 cents per share, which decreased 1% from the year-ago quarter. Including 9 cents of accounting charges related to the adoption of ASU 2016-09, earnings were 89 cents per share that missed the Zacks Consensus Estimate by a couple of cents.

Revenues decreased 2% from the year-ago quarter to $1.08 billion and missed the Zacks Consensus Estimate of $1.09 billion. Internal revenues declined 1.4%. Management noted that the loss of a contract with the Department of Homeland Security (DHS) and other net contract declines across its portfolio negatively impacted revenues.

Notably, though SAIC has won quite a few federal contracts, the low-margin nature of the deals adversely impact the profitability of the company. This has been reflected in investor confidence to an extent as evident from its share price performance. SAIC stock has lost 13.8% year to date, substantially underperforming the 33.5% rally of the industry it belongs to.

Factors to Consider

We note that SAIC has been winning federal contracts frequently, which boost its top line.

In the soon-to-be-reported quarter, SAIC was awarded two joint contracts by NASA. The U.S. Marine Corps provided an initial Low Rate Initial Production (LRIP) option to SAIC for supplying Assault Amphibious Vehicle (AAV) Survivability Upgrade (SU) to the former.

The company won a deal from Commonwealth of Virginia and announced a partnership with ST Kinetics and CMI Defence for the development of prototypes of combat vehicles. The company was also awarded a deal by the United States Department of Agriculture (USDA) in fiscal third-quarter 2018.

However, unfavorable contract mix is hurting profitability and hence its earnings. The company continues to witness increase in cost reimbursement type contracts compared with fixed price contract, which is expected to be a drag on margins.

What Our Model Says

According to the Zacks model, a company with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) has a good chance of beating estimates if it also has a positive Earnings ESP. The Sell-rated stocks (Zacks Rank #4 or #5) are best avoided. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

SAIC has a Zacks Rank #4 (Sell) and its Earnings ESP is 0.00%. Therefore, the company is unlikely to deliver a positive surprise this quarter.

Stocks to Consider

Here are a few stocks which, as per our model, have the right combination of elements to post an earnings beat this quarter:

Arista Networks (NYSE:ANET) with an Earnings ESP of +2.13% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

NVIDIA (NASDAQ:NVDA) with an Earnings ESP of +1.31% and a Zacks Rank #1

Micron Technology (NASDAQ:MU) with an Earnings ESP of +1.60% and a Zacks Rank #3.

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