Will SAIC's Shares Pop After Wednesday's Earnings Report?

SAIC, Inc. (SAI) is scheduled to report Q2 2010 earnings on Wednesday, September 2nd, 2009, after market close.

Over the past year, SAIC’s share price has jumped an average of 6.11% the day after quarterly earnings have been reported. When the San Diego-based defense contractor, with over 45,000 employees worldwide, reported Q1 2010 earnings on June 3, 2009, shares rose over 7% the next day.

Today, SAIC’s shares are trading between $18.39 and $18.50. SAIC September $17.50 in-the-money calls are priced at $1.075 - $1.15, with a Delta of 0.76, against open interest of 1,179.

Could SAIC’s shares pop again next Thursday?

Not all of SAIC’s earnings announcements have been met with optimism in the market, however. For example, when the company announced its Q4 2008 earnings on March 25, 2008, it reported greater profit and revenue than Wall Street expected, but also warned that future earnings might fall short of expectations due to declining interest rates cutting into the company’s interest income. SAIC shares slipped in after-hours trading and closed 2% lower the next day.

When SAIC delivered its Q1 earnings report on June 3, it reaffirmed forward guidance for Fiscal Year 2010, with a subtle caveat that “Absent further disruptions in government funding, the company currently expects to achieve all of its long-term, average annual financial goals in fiscal year 2010.”

In May 2009, U.S. Defense Secretary Robert Gates announced that he was terminating the vehicular portion of the Army's Future Combat System (FCS) development program. The FCS program was designed to implement a new approach to ground fighting by outfitting the Army with cutting-edge technology including sophisticated vehicles and drones. Chicago-based The Boeing Co. (BA) had partnered with SAIC as the lead contractor on the FCS program. The companies stood to earn $2 billion from the program.

On June 24, 2009, the U.S. Army issued a stop work order for the FCS Manned Ground Vehicle (MGV) and Non-Line of Sight Cannon (NLOS-C), and on July 20, 2009, the Army issued a press release announcing the partial termination of the FCS Manned Ground Vehicle (MGV) development effort under the Brigade Combat Team (BCT) System Development and Demonstration (SDD) contract with the Boeing Company. This action was taken to comply with both the Secretary of Defense's recommendation to cancel the FCS BCT program.

In a July 18 article published by the San Diego Union-Tribune, SAIC indicated that funding cutbacks for the FCS program required a 30 percent reduction in the program's work force, and that consequently SAIC had already begun to inform its employees of an expected 140 related job cuts.

Although Boeing and SAIC reportedly will receive approximately $350 million in contract cancellation penalty fees, it is clear that since SAIC’s June 3 earnings report, “disruptions in government funding” have indeed occurred.

News headlines and press releases issued by SAIC since its last earnings report indicate that the company has been awarded government contracts potentially worth over $700 million in recent months.

It remains to be seen, though, whether the defense contractor can maintain its positive FY2010 outlook in light of changes in the Defense Department’s game plan. No doubt, investors will know more after next Wednesday’s earnings report.

Disclosure: The author owns no stock and holds no option positions in SAIC or Boeing.