Episode Details

Science Applications International (SAIC) Q2 FY2027 — Shares gapped 11.5% on results day and touched a 52-week high of $142.66, then handed the whole move back to close at $128.22, up just 1.79% on 4.6x volume; one session later they sit at $126.78. SAIC's income before income taxes ROSE 10.2% to $119M. Its net income FELL 19.7% to $102M. The entire $36M gap is one line: the base quarter carried a $47M tax benefit from settling an IRS audit of fiscal 2016-2019, which the 10-Q names outright. That is $1.00 per prior-year diluted share. It is why adjusted EPS of $3.01 against $3.63 reads as -17.1% - and why, against a base cleaned of that credit ($2.63), the same quarter is +14.5%. The same dollar sits inside FY2026's $10.75 full-year adjusted EPS, so guidance of $10.65-$10.75 looks flat and is really about +10%. But the operating business is barely growing: book-to-bill was 0.6 in the quarter and 0.8 over twelve months against 1.1 at the January year end, and SAIC's own raised revenue guidance implies a second half that SHRINKS 4.2% after a first half that grew 3.8%. We rate SAIC a HOLD, fair value $127.83 against $126.78. THE CALL: HOLD (3/5, MODERATE) — base-case value ~$127.83 vs ~$126.78 today. KEY METRICS: - Revenue $1,880M +6.3% (5.3% organic) beat consensus by $116M; operating income $152M +9.4%, margin 8.1% vs 7.9% - Income before income taxes $119M, +10.2% - but net income $102M, -19.7% - The tax line swung $36M: a $17M charge this year against a $19M net CREDIT last year - Effective tax rate 14.2% this quarter vs NEGATIVE 17.2% in the base quarter (10-Q tax note) - The cause, quoted in the 10-Q: a $47M tax benefit from settling an IRS audit of fiscal 2016-2019 - $47M across the 46.8M prior-year diluted shares = $1.00 per share of non-repeating base - Adjusted EPS $3.01 vs $3.63 = -17.1%; vs a cleaned $2.63 base = +14.5% - EPS basis PROVEN quarterly: H1 GAAP $5.00 less Q2 $2.38 = the filed Q1 $2.62; H1 adj $6.24 less $3.01 = the filed $3.23 - Of the $0.38 of real adjusted EPS growth, $0.25 was the buyback and only $0.13 the business - Adjusted operating margin 10.2% vs 10.3%; adjusted EBITDA margin 10.3% vs 10.5% - BOTH lower - SG&A $87M, +16.0%, on revenue up 6.3% - the line that erased a 50bp segment margin gain - Book-to-bill 0.6 in the quarter, 0.8 TTM, vs 1.1 at the January year end; backlog $22.1B, -$486M in six months - Guidance raised to $7.2B-$7.3B revenue and $10.65-$10.75 adjusted EPS - but the EPS raise ($0.70) is EXACTLY the quarter's beat - That guide implies H2 revenue of $3.46B, -4.2%, after H1 grew +3.8% - an 8.0 point swing - H1 operating cash flow $273M vs $222M - and last year's included $101M pulled forward by selling receivables, this year's $0 - Net debt $2,359M = 3.13x guided adjusted EBITDA; tangible book value is NEGATIVE $2,204M - Fair value $127.83: DCF $130.08, 10.25x guided EBITDA $125.10, 12x guided adjusted EPS $128.40, weighted 35/35/30 What to watch: Trailing book-to-bill back above 1.0 would make the guided H2 decline a phasing problem rather than a trend, and make us buyers at an 11.1% free cash flow yield; a third quarter below 1.0 turns it into a run-rate Also on YouTube: @ChargedAlpha DISCLAIMER: For informational and educational purposes only. Not financial advice. Do your own research before any investment decision.