William Blair analyst Timothy McHugh this morning picked up coverage of the government consulting sector from colleague Laura Lederman, and in the process cut the firm’s rating on SAIC (SAI) to Market Perform from Outperform.
McHugh writes that SAIC is “a bellwether company” for the group, well-run with a strong brand and customer relationships, generating one of the highest returns on capital in the consulting industry. But he adds that “at its current size, it is heavily affected by overall trends in the government consulting industry, which have become more challenging.”
He notes that the company expects “nominal growth” this year, and that downward pressure on discretionary federal government spending will persist over the long term.
“We do not expect further erosion in the company�s P/E multiple, but we also are not optimistic that the company�s valuation multiples will re-expand quickly,” he writes. “We thus believe that a Market Perform rating is more appropriate at this time. We look for signs of accelerating contract awards, value-creating uses of the company�s solid free cash flow, or expanding valuation multiples across the government consulting group to become more positive on the stock.”
SAIC shares are down 20 cents, or 1.1%, to $17.49.
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