SAIC and MO

Malcolm Berko
Tue, 05 Feb 2019 21:00:00 -0800
Lifestyle

Dear Mr. Berko: I have 28 shares of Science Applications International Corp. in my account and don't know how they got there. If they're mine, should I keep them or sell them? I've changed brokerage firms six times in the past 12 years, and my current stockbroker thinks my old broker accidentally posted those shares to my account when I moved last year.

I'd also like to buy 300 shares of Altria Group, which recently bought a large stake in Juul. Please give me your opinion of this stock. — JS, Akron, Ohio
Updated: Wed Feb 06, 2019

Dear Mr. Berko: I have 28 shares of Science Applications International Corp. in my account and don't know how they got there. If they're mine, should I keep them or sell them? I've changed brokerage firms six times in the past 12 years, and my current stockbroker thinks my old broker accidentally posted those shares to my account when I moved last year.

I'd also like to buy 300 shares of Altria Group, which recently bought a large stake in Juul. Please give me your opinion of this stock. — JS, Akron, Ohio

Dear JS: Yikes, six brokers in a dozen years?! Ouch! And how many times have you been married?

Where were you in 2013? You either owned shares of Leidos Holdings at one time or continue to own shares of the company. Leidos Holdings (LDOS-$61) is a $10 billion-revenue company that does a lot of critical oddball work for the U.S. government. In September 2013, LDOS spun off Science Applications International Corp. (SAIC-$50.69) to shareholders. For every seven shares of LDOS investors had, they got one share of SAIC. Assuming one of your six brokers didn't erroneously gift you 28 shares of SAIC, then you owned about 200 shares of LDOS in September 2013.

SAIC has $4.5 billion in revenues. It provides enterprise information, technology services and technical engineering to the U.S. government, particularly the Department of Defense and NASA. SAIC's people design, develop and control projects that empower diplomatic missions, support war-fighting requirements and support advanced exploration, from the ocean floors to outer space. This 14,000-employee company provides end-to-end capabilities and solutions for its various projects, many of which are top-secret. And in September, SAIC purchased Engility for $2.5 billion, bringing important intelligence and new clients complimentary to SAIC mission-focused offerings. Engility is expected to improve SAIC's operating margins by nearly 200 basis points and add about $2 billion to SAIC's revenue base. SAIC is among those quiet companies working with iniquitous government agencies that produce unique outcomes about which Hollywood makes movies.

I know nothing about national security, embassy staffing, logistics training, support services or maritime, ground and client security for the Department of Homeland Security and the State Department. I just know that SAIC is a government-funded company and that when a government funds projects, the profits are enormous. However, a significant portion of those profits are, in uncommon ways, shared with sycophantic and unctuous lobbyists who deliver contracts to SAIC from the Department of Defense, NASA, etc.

I know something about this business. The shares are down from last year's high of $93. However, Value Line's Kevin Downing believes that SAIC could more than double in the coming three to four years. S&P has a "strong buy" rating on SAIC, while Thomson Reuters, Ned Davis Research and Jefferies regard SAIC shares as a "buy." And Nazzic Keene, who joined SAIC in 2012, was recently named chief operating officer of the year by the Washington Business Journal.

Altria Group (MO-$49) is down about 32 percent from its high last year. The dividend, now $3.20, has tripled in the past decade and yields a sweet 6.5 percent. Altria's cigarette business (Marlboro, Benson & Hedges, Merit, Virginia Slims et al.) was 88 percent of last year's $25 billion in revenues. As you alluded to, MO spent nearly $13 billion for a 35 percent stake in Juul. Management had a very strategic and important rationale for that. Juul is growing rapidly (it grew by over 400 percent last year), and management expects that Juul's revenues and profits will be driven even higher by an attractive overseas market for e-cigarettes. And unlike the vaping operations of the Big Tobacco companies, Juul is already profitable. In the meanwhile, MO made a $1.8 billion investment for a 45 percent stake in Cronos Group, a Canadian cannabis company. Cronos (CRON-$21) will use this money to expand distribution and increase its research and development. CRON isn't profitable yet, but adding MO's R & D and marketing muscle, it should soon be.

I think MO is a smart buy. I could see, barring any misfortune or misadventure, MO's revenues, earnings and dividends growing very nicely over the coming years. And many of Wall Street's brokerages agree. Buy it.