What's Driving SAIC's Explosive Rally and Should You Care

2025-12-26 03:21:16

Abstract generation in progress

Science Applications International Corporation (NASDAQ: SAIC) delivered a remarkable 17.9% intraday surge on fiscal Q3 2026 results, but the real story lies beneath the surface of what initially appears to be a mixed quarter.

The Numbers That Matter

The stock’s 170-basis-point jump came despite some concerning headline metrics. Revenue declined 6% year-over-year, while operating profit contracted 20%, compressing operating margins by 120 basis points. Net earnings under GAAP accounting plummeted 21% to $1.69 per diluted share. On the surface, these figures would typically signal weakness.

Yet here’s what caught investors’ attention: Adjusted earnings per share reached $2.58, meaningfully exceeding the consensus forecast of $2.15. More importantly, the company generated $135 million in free cash flow during the quarter—substantially exceeding both reported operating and net income figures. This divergence between accounting profit and actual cash generation reveals the true financial health investors are evaluating.

The Forward-Looking Catalyst

Management’s guidance provides the genuine excitement behind today’s move. The book-to-bill ratio of 1.2x signals that the company has substantial future revenue visibility, with more than $1.20 in committed orders backing every $1.00 of current quarterly sales. This metric historically correlates with accelerating revenue growth in coming quarters.

Supporting this thesis, management increased full-year sales guidance to approximately $7.3 billion and projects free cash flow exceeding $550 million annually. Adjusted earnings guidance ranges from $9.80 to $10.00 per share.

Valuation in Focus

At $4.9 billion market capitalization, SAIC trades at just 8.9x free cash flow—a notably compressed multiple for a defense and IT contractor with positive forward guidance. Adjusting for the company’s debt levels yields an enterprise value-to-free cash flow ratio of 13.3x, further reinforcing the valuation case.

The mathematics suggest modest growth rates would comfortably justify current pricing, explaining why seasoned investors responded positively despite the quarter’s apparent contradictions. For those evaluating SAIC as a potential portfolio addition, the combination of conservative valuation and strengthening order visibility warrants closer examination.

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