How Dividend Paying SAIC Will Benefit From Splitting In Two

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SAIC, Inc. (SAI) is a $3.87 billion mid-cap technical services company that provides solutions for the U.S. Government, the intelligence community, state and local governments, foreign governments, and for commercial customers. The company provides engineering, systems integration, and scientific solutions for its customers. This includes complex software solutions, network processes, cyber security, training simulations, risk management, disaster recovery services, and more.

SAIC has plans to split up into two separate publicly traded companies. The plan, known as Project Gemini, is expected to be completed in the second half of the next fiscal year. The completion is contingent upon approval from the SEC, IRS, and the board. One company is to be focused on federal and commercial solutions in national security, engineering, and health markets. The other company will be focused on enterprise IT and government technical services.

One reason that SAIC is forming two separate companies is because the company is currently blocked from using some of its technology due to conflict of interest clauses within the Defense Solutions service contracts. The planned separation will allow for new technologies and systems to be deployed to specifically address maritime threats. These threats include piracy, maritime terrorism, and any other potential interruptions of trade that threatens global safety. The Asia-Pacific region is an area of increasing concern for maritime threats.

The market for providing these new systems is expected to be approximately $3 billion over the next five years. Some of the customers that will no longer be in conflict as a result of the separation are: the U.S. Army's Communications-Electronics Command (CECOM); the Army's Program Executive Office for Intelligence, Electronics, Warfare and Sensors (PEO IW&S); the Navy's Naval Air Systems Command (NAVAIR); and the U.S. Special Operations Command (SOCOM).

The dissolving of the contract restrictions as a result of the split will also allow for $4 billion in ground Intelligence, Surveillance, and Reconnaissance (ISR), $7 billion in the PED market, and $11 billion in the space ISR market.

The services side of the business, which will comprise the other new publicly traded company, will also see increased revenue over the next four years as a result of the split. This includes $19 billion in the Department of Defense and an additional $9 billion in the federal civilian market.

SAIC has also identified a new set of over 40 federal civilian agency opportunities worth about $10 billion in total value. These opportunities include: the Department of Homeland Security, the Federal Aviation Administration, and NASA.

Overall, the splitting of SAIC into two separate companies is expected to generate about $63 billion in new revenue over the next five years. Net bookings for the company in Q3 FY13 totaled $4.8 billion. At the end of the third quarter, the company's total backlog was $18.6 billion, which was 12% higher than Q2.

SAIC currently pays a sizable dividend of 4.2%. The company said that the two separate companies will initially pay dividends approximately equal to the current SAIC rate.

When looking forward, SAIC looks undervalued. The company has a forward PE ratio of 8.68 and a PEG of 0.87. The stock currently trades at only 1.58 times its book value per share. Another interesting valuation statistic is its low price to sales ratio of 0.35, further reinforcing this undervaluation.

The company increased its EPS guidance for the year to be in the range of $1.49 to $1.54, up from previous estimates of $1.26 to $1.36. SAIC is expected to grow earnings annually at 8.67% for the next five years.

Due to the uncertainty with regard to the impending fiscal cliff resolution, it would probably be wise for investors who don't yet own the stock to wait and see how any new decisions on government spending will affect the company. However, due to the ongoing global threats that SAIC works to address; I don't think that the company will be significantly negatively impacted.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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