Is SAIC's Growth in Danger?

Next Monday, SAIC (NYSE: SAI  ) will release its latest quarterly results. Even though the stock has soared to two-year highs recently, investors appear nervous about the company's earnings prospects going forward.

SAIC has capitalized on the increasing demand for solutions designed to prevent cyber attacks. With technology leaving government agencies and private-industry companies increasingly vulnerable, the need for cyber security looks likely to grow in the coming years, but competitors have flooded into the space. Let's take an early look at what's been happening with SAIC over the past quarter and what we're likely to see in its report.

Stats on SAIC

Analyst EPS Estimate	$0.26
Change From Year-Ago EPS	(26%)
Revenue Estimate	$2.59 billion
Change From Year-Ago Revenue	(7%)
Earnings Beats in Past 4 Quarters	2

Source: Yahoo! Finance.

Will SAIC defend its earnings growth this quarter?
In recent months, analysts have cut back on their views on SAIC's earnings, with a $0.05 per share reduction in their April-quarter projections and more than double that drop in their current-year outlook. That pessimism hasn't done much to hold back the stock, though, as shares have risen more than 30% since late February.

The fundamental underpinnings for SAIC's cyber-security business have been strong for quite a while, as growing cyber-security threats jeopardize key government and private-sector technology installations. With North Korean hackers having successfully shut down tens of thousands of servers in South Korea, the U.S. government has gotten serious about the threat, and SAIC won an extension in May for an eighth year serving the Pentagon on a contract that could be worth as much as $381 million. Moreover, the company is working with non-military government applications, having won a $140 million contract alongside competitor CACI International (NYSE: CACI  ) to deliver IT support to the Pension Benefit Guaranty Corporation. Moreover, SAIC has an advantage over CACI in that while the government agency didn't actually award CACI a definite part of the contract when it made the announcement in March, SAIC already won one of the major parts of the contract, with expectations of taking at least half of the $140 million for itself.

But SAIC doesn't just handle cyber-security. The company works with Raytheon (NYSE: RTN  ) on a project to extend the use of drones in anti-submarine detection work, with the Anti-Submarine Warfare Continuous Trail Unmanned Vehicle allowing submarine tracking without the need to build much more expensive submarines that put military personnel in harm's way. Raytheon won't deliver its sonar system for the project until late 2014, but the project has plenty of potential for both it and SAIC.

Enthusiasm about SAIC's stock really took off in late March, when the company announced a reasonably strong fourth quarter. In addition to a turnaround from a year-ago loss to a profit, the company also agreed to pay a special dividend of $1 per share next month.

The big strategic question facing SAIC involves its planned split into two parts. The plan involves breaking off its government-facing services unit into a separate business that will keep the SAIC name, while renaming its remaining business as Leidos, which will keep its technology businesses with a focus on engineering, health, and national security. With the environment for government-related defense stocks somewhat shaky, it's still unclear exactly when SAIC will execute its split.

In SAIC's report, watch to learn more about the company's future strategic plans, including the Leidos split. Moreover, with sequestration showing no signs of ending soon, take a close look at whether recent contract wins are enough to keep SAIC's earnings moving higher. If the company can't keep growing, then recent share-price gains aren't likely to hold up.

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