In first quarter, too soon to say which SAIC company will fare best

When McLean-based Science Applications International Corp. split into two companies — one that retained the SAIC name and the other called Leidos — some assumed Leidos would fare better.

After all, Leidos kept many of the units focused on promising markets, including health care and intelligence work, as well as the SAIC leadership team, from John Jumper, SAIC’s chief executive, to K. Stuart Shea, the contractor’s chief operating officer.

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When the two companies split, “the promise was ... that Leidos would be in the fastest-growth areas,” said William Loomis, an analyst with financial services firm Stifel Nicolaus.

Neither company reported growth in its most recent quarter earlier this month — but it was Leidos that had a tougher start out of the gate, surprising some analysts.

Leidos earlier this month said revenue for the three-month period ended Nov. 1 fell about 15 percent to hit $1.4 billion. The company reported a $3 million loss in income for the quarter, as compared to a $112 million profit in the same period last year.

The contractor opted to make a leadership change in its health and engineering segment, which saw operating income fall 165 percent. Joe Craver, the head of the group, has stepped down, and Jumper has become the unit’s acting head as Leidos searches for a new executive.

Jumper said earnings were hurt by declining hospital IT budgets and “general turbulence” associated with the Affordable Care Act registration process. Additionally, the company was weighed down by costs associated with two commercial health care acquisitions.

In an interview last week, Shea acknowledged that “there was an expectation that we would come out stronger,” but said the contractor faced multiple one-time charges.

“Short-term performance is interesting, but it’s really the long-term value proposition,” he added. “The best interest of the shareholders, long-term, was to position both companies for success.”

SAIC, on the other hand, had a similar experience with its revenue for the three-month period ended Nov. 1. The company’s sales fell about 18 percent to $974 million.

But profit dipped less dramatically, falling about 51 percent to hit $22 million. SAIC officials declined to comment for this story.

Michael S. Lewis, managing director of the Silverline Group, a defense industry consulting firm, said SAIC’s declining sales were expected; it was Leidos’s results that were lower than some analysts anticipated.

“There is a higher level of uncertainty with regard to what’s the strategy of Leidos,” he said. “The health care component of Leidos has been a big negative surprise to investors.”

Still, it’s early to draw conclusions about the two businesses, which both said they were hurt by separation costs as well as the government shutdown in the fall. And the two have only been separate companies since late September.

Loren Thompson, a defense industry consultant, said it’s too soon to judge which business will do better.

“You can’t judge these enterprises for the long-term based on how they fared in a single quarter,” he said. “Over the long-term, Leidos is likely to do better, but its near-term problems may make SAIC look like the better investment.”

Lewis too said any short-term declines will be forgotten if the companies regain their footing. Investors “have a short memory,” he said.

 
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