SAIC's $130B Pipeline Boosts Outlook, Booz Allen Faces Valuation Challenge, Says JP Morgan

JP Morgan analyst Seth M. Seifman changed the rating on federal IT services companies, Science Applications International Corporation SAIC and Booz Allen Hamilton Holding Corporation BAH.

The analyst upgraded Science Applications to Overweight from Neutral and raised the price target to $170 from $150.

During the April Investor Day, management emphasized plans to transition SAIC toward higher-value work, which is still in its early stages. Meanwhile, the analyst notes that last quarter’s results showed that SAIC is progressing.

Seifman writes that they see it in the qualified pipeline growing from approximately $115 billion in FY24 to $130 billion and in the planned increase in submitted bids from $17 billion last year to $22 billion this year.

The analyst says that SAIC must secure new contracts and effectively execute them, as some projects may carry higher risks and technical demands, though they offer the potential for improved margins.

Seifman says that SAIC should overcome challenges from lost recompetes that are currently suppressing organic growth by about five points this fiscal year. However, the risk of recompete losses is expected to decline next year, adds the analyst.

Also Read: Deep Dive Into Booz Allen Hamilton Stock: Analyst Perspectives (8 Ratings)

On the other hand, Seifman downgraded Booz Allen Hamilton to Underweight from Neutral but raised the price target to $158 from $154.

BAH has experienced several quarters of exceptional growth, but the analyst expects this growth to normalize to a level more in line with peers, which may pose a challenge for its relative valuation.

The analyst says that last quarter, the company reported a revenue shortfall, excluding billable expenses, along with higher-than-expected costs, resulting in an adjusted EBITDA miss. Despite this, the stock has rebounded to an all-time high.

The analyst’s fiscal second-quarter estimate aligns with consensus, and they do not view this quarter as a negative catalyst.

However, Seifman notes BAH faces a high bar for performance and could be vulnerable to signs of decelerating growth.

Price Action: BAH shares are down 1.01% at $161.74, while SAIC shares are up 0.86% at $141.99 at the last check Wednesday.

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