Leidos Holdings, Inc.

Leidos Holdings, Inc. (NYSE: LDOS) provides scientific, engineering, system integration, technical services, and solutions to the US Department of Defense, the Intelligence Community, and the British Ministry of Defense, among others.

Why Should Investors Exit?

• Leveraged Balance Sheet: The company is exposed to a higher balance sheet risk than its peers, with a Debt/Equity ratio of 1.18x as of December 31, 2021, compared to the industry median of 0.43x, implying a higher balance sheet risk. As of December 31, 2021, the company had cash & cash equivalents of USD 727 million and total debt of USD 5.08 billion. Because of its leveraged financials, the company is vulnerable to changes in interest rates.
• High Cash Conversion Days: The company has a long Cash Conversion Cycle (Days) compared to the industry, which means it takes longer  to convert inventory to cash. In FY21, its Cash Cycle was 66.4 days, compared to 38.0 days for the industry.
• Margin Pressure: In FY21, the company's gross margin was 14.7%, compared to the industry norm of 52.4%. In the last four years, the company has had an average margin of 14%, indicating it is a business with a high cost of sales.
• Technical Weakness: On the daily chart, LDOS prices are sustaining below the downward sloping trend line and facing the same resistance. Furthermore, the momentum oscillator RSI (14-period) is trading at ~43.20 level. However, on the daily chart, the prices are trading below the trend-following indicators 21-period and 50- period SMA, which may act as a resistance level for the stock.

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation

(Analysis by Kalkine Group)

* % Premium/(Discount) is based on our assessment of the company's FY1 trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation:

LDOS' share price has fallen 18.96% in the past twelve months and is currently leaning towards the lower end of its 52-week range of USD 82.75 to USD 108.83. We have valued the stock using the EV/EBITDA-based relative valuation methodology and arrived at a target price of USD 78.10.

Considering the company's leveraged balance sheet, top-line stress, operating at shallow margins, and current valuation, we recommend a "Sell" rating on the stock at the closing price of USD 87.36 as of February 14, 2022.

Three-Year Technical Price Chart (as of February 14, 2022). Analysis by Kalkine Group

* The reference data in this report has been partly sourced from REFINITIV.

* All forecasted figures and industry information have been taken from REFINITIV.