Underwriters Do No Justice to SAIC on New Coverage

by Jon C. Ogg
November 22, 2006

SAIC (SAI-NYSE) has actually been a good IPO, but the analysts and brokerage firms that initiated coverage just marched SAIC back behind the building and gunned it down.

The joint book-runners for the IPO were Morgan Stanley and Bear Stearns, and they didn’t do the company any favors.  Morgan Stanley gave its opening coverage as an Equal Weight rating and Bear Stearns started covereage with a Peer Perform rating.  Rating coverage like that only helps if it is an upgrade from a Strong Sell or if the stock has been in freefall, but not for an IPO.

The extensive list of co-managers also started SAIC with a blah coverage universe: Citigroup started as Hold with $20 target; Banc of America started as Neutral with a $20 target; Cowen & Co started as Neutral; Jefferies started as Hold and $20 target; Stifel Nicolaus started as Hold; Wachovia is stilll unknown as far as their coverage initiation.

We also saw coverage outside of the underwriting syndicate, although they are not bound by the 30 day waiting period before initiating coverage. KeyBanc Capital/McDonald started coverage as Hold; Susquehanna Financial started coverage as a Neutral.

Taking the opposite stance of analysts can be very rewarding, but this is a mixed message.  Usually investors into hot IPO issues liek to see at least some coverage initiated with a positive tone.  If they are all Hold and Market Perform, and Equal Weight ratings out of the chute, it does at least leave more room for upside to ratings revisions later.  The problem is that they just all set the tone and the few seen price targets are actually under the highest prices where SAI has already traded.

The company priced its IPO of 75 million shares at $15.00 per share, but it closed at $17.97 on its opening day.  It traded up to $20.00+ within two weeks and has since had intra-day highs of $21.10.  The SAI stock closed at $19.26 yesterday and shares are down 1.25% at $19.03 after the open today.

You can always be like Dr. Pangloss and think that this means there only can be upside from here, but the street usually gets more excited about recent IPO’s coming off the quiet period (for analysts) when at least some coverage out there is positive.  In this case, not even the independent firms that were outside of the syndicate gave it that positive coverage.