While the tech industry is under pressure due to the macroeconomic challenges, its long-term prospects look bright. So, investors could look to buy fundamentally solid tech stocks, Science Applications International Corporation (SAIC), Teradata Corporation (TDC), and Celestica Inc. (CLS).
According to the most recent Gartner, Inc. prediction, global IT spending would hit $4.6 trillion in 2023, a 5.5% rise from 2022.
John-David Lovelock, Distinguished VP Analyst at Gartner, said, “Macroeconomic headwinds are not slowing digital transformation. IT spending will remain strong, even as many countries are projected to have near-flat gross domestic product (GDP) growth and high inflation in 2023. Prioritization will be critical as CIOs look to optimize spend while using digital technology to transform the company’s value proposition, revenue, and client interactions.”
The IT Services industry is expected to generate $440.20 billion in revenue by 2023, with revenue anticipated to grow at a 6.3% CAGR, resulting in a market volume of $561 billion by 2027.
Investors’ interest in tech stocks is evident from the Technology Select Sector SPDR ETF’s (XLK) 12.7% returns over the past three months and 19.3% over the past six months.
Let’s delve deeper into the fundamentals of the stocks mentioned above.
Science Applications International Corporation (SAIC)
SAIC provides technical, engineering, and enterprise information technology services. The company serves the U.S. military and various intelligence community agencies, as well as U.S. federal civilian agencies.
On April 25, 2023, SAIC has been granted a $889 million contract by the Federal Systems Integration and Management Center (FEDSIM) to design and execute One IT in support of the Defense Counterintelligence and Security Agency (DCSA). DCSA’s systems are modernized by One IT.
Michael LaRouche, president, National Security and Space sector at SAIC, said, “As the Defense Counterintelligence and Security Agency transforms security work around the globe, SAIC looks forward to advancing support for user communities. Our goal is to enhance efficiency and effectiveness of the agency’s One IT infrastructure by leveraging the experience of our proven team of cloud architects, modernization engineers and integration specialists.”
In terms of forward non-GAAP P/E multiple, SAIC is trading at 14.39 is 12.7% lower than the industry average of 16.48. In addition, SAIC’s forward EV/Sales of 1.10x is 31.6% lower than the industry average of 1.10x.
SAIC’s trailing-12-month asset turnover ratio of 1.36% is 71% higher than the industry average of 0.80%. Its trailing-12-month ROCE of 18.11% is 32.7% higher than the industry average of 13.64%.
For the fourth quarter that ended February 3, 2023, SAIC’s revenues increased 10.4% year-over-year to $1.97 billion. Its operating earnings increased 38.8% from the year-ago value to $118 million. Also, its net income and EPS came in at $74 million and $1.34, up 72.1% and 76.3% year-over-year, respectively.
The consensus revenue estimate of $7.22 billion for the year ending January 2025 represents a marginally increase year-over-year. Its EPS is expected to grow at 7.9% year-over-year to $7.49 for the same period. It surpassed the EPS estimates in all four trailing quarters.
SAIC’s shares have gained 4.7% over the past nine months to close the last trading session at $99.90.
SAIC’s POWR Ratings reflect this promising outlook. The stock has an overall rating of A, equating to a Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
SAIC has a B for Growth and Value. Within the Technology - Services industry, it is ranked #3 out of 81 stocks. Click here for the additional POWR Ratings for Stability, Momentum, Sentiment, and Quality for SAIC.
Teradata Corporation (TDC)
TDC provides a connected multi-cloud data platform for enterprise analytics to various industries, including automotive, energy and natural resources, financial services, government, healthcare, manufacturing, retail, and telco.
On May 18, 2023, TDC and FICO, the analytics software supplier, announced plans to bring integrated advanced analytic solutions for real-time payments fraud, insurance claims, and supply chain efficiency to the market.
The outcome’s solutions are part of the two businesses’ new worldwide collaboration and are intended to result in lower costs, more profitability, stronger risk mitigation, and higher customer satisfaction for Teradata/FICO clients.
TDC’s trailing-12-month EV/EBIT multiple of 14.78 is 14.6% lower than the industry average of 17.31. Its trailing-12-month Price/Cash Flow multiple of 13.23 is 30.7% lower than the industry average of 19.09.
Its trailing-12-month ROTA of 1.86% is 383.6% higher than the 0.39% industry average. Its trailing-12-month ROCE of 15.85% is significantly higher than the 1.04% industry average.
During the fiscal fourth quarter that ended March 31, 2023, TDC’s recurring revenue rose marginally year-over-year to $389 million. Its income from operations grew 16.2% year-over-year to $79 million, while net income increased 11.1% from the prior-year quarter to $40 million. Moreover, the company reported a EPS of $0.39, up 18.2% year-over-year.
Analysts expect TDC’s revenue to increase 2.1% year-over-year to $1.83 billion in 2023. Its EPS is expected to grow 20% year-over-year to $1.97 in 2023. It surpassed EPS estimates in three of four trailing quarters. The stock has gained 45.8% over the past six months to close its last trading session at $46.40.
It’s no surprise that TDC has an overall A rating, equating to a Strong Buy in our POWR Ratings system. It has an A grade for Quality and a B for Growth and Value. It is ranked #2 in the same industry.
Beyond what is stated above, we’ve also rated TDC for Stability, Sentiment, and Momentum. Get all TDC ratings here.
Celestica Inc. (CLS)
Headquartered in Toronto, Canada, CLS provides hardware platform and supply chain solutions in North America, Europe, and Asia. The company’s segments are Advanced Technology Solutions; and Connectivity & Cloud Solutions. It serves aerospace and defense, health tech, industrial, original equipment manufacturers (OEMs), and communications and enterprise markets.
CLS’ forward EV/Sales multiple of 0.24 is 91.1% lower than the industry average of 2.70. Its forward Price/Sales multiple of 0.18 is 93.1% lower than the industry average of 2.61.
CLS’ trailing-12-month ROCE of 9.38x is 801.9% higher than the 1.04x industry average. Its trailing-12-month ROTA of 2.71% is 604.4% higher than the 0.39% industry average.
For the first quarter that ended March 31, 2022, CLS’ revenue increased 17% year-over-year to $1.84 billion. Its gross profit grew 23.8% year-over-year to $164 million. Furthermore, CLS’ net earnings increased 13.3% year-over-year to $24.70 million, and its EPS came in at $0.20, up 17.6% year-over-year.
Street expects CLS’ revenue to increase 5.4% year-over-year to $7.64 billion in 2023. Its EPS is expected to grow 7.1% year-over-year to $2.03 in 2023. It surpassed EPS estimates in all four trailing quarters. Over the past year, the stock has gained 3.2% to close its last trading session at $11.40.
CLS’ POWR Ratings reflect its solid prospects. The stock has an overall A rating, translating to Strong Buy in our proprietary rating system.
It also has an A grade for Value and Momentum and a B grade for Growth. It is ranked #4 within the same industry. Click here to see the additional ratings for CLS (Stability, Sentiment, and Quality).
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SAIC shares were trading at $98.57 per share on Friday afternoon, down $1.33 (-1.33%). Year-to-date, SAIC has declined -10.53%, versus a 9.86% rise in the benchmark S&P 500 index during the same period.
About the Author: Rashmi Kumari
Rashmi is passionate about capital markets, wealth management, and financial regulatory issues, which led her to pursue a career as an investment analyst. With a master's degree in commerce, she aspires to make complex financial matters understandable for individual investors and help them make appropriate investment decisions.
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