Leidos Holdings, Inc.

LDOS Details

Leidos Holdings, Inc. (NYSE: LDOS) is a Fortune 500 science, engineering, and information technology company that provides services in the areas of digital modernization, cyber operations, mission software systems, integrated systems, and mission operations, mainly to various government entities and their agencies. The solutions are primarily in defense, intelligence, civil, and health markets. Their company's key customers are the U.S. Department of Defense (DoD), the U.S. Intelligence Community, the U.S. Department of Homeland Security (DHS), the Federal Aviation Administration (FAA), the Department of Veterans Affairs (VA), and other U.S. civilian, state, and local government agencies. LDOS operates in three segments, viz. Defense Solutions, Civil, and Health. As of May 28, 2021, the company’s market capitalization stood at USD 14.55 billion. 

Acquisition of Gibbs & Cox, Inc.: On May 07, 2021, LDOS announced the completed acquisition of Gibbs & Cox, Inc. for approximately USD 380 million in an all-cash transaction. Gibbs & Cox is the biggest independent ship design firm focused on marine engineering and naval architecture. The acquisition will enable Leidos to provide a broad range of engineering solutions to the US Navy and other foreign Navies.

Contract Wins Add to the Backlog: On May 06, 2021, LDOS was awarded the Information Technology SITE III vehicle contract from the Defense Intelligence Agency (DIA). It is a 10-year multiple-award contract with a total estimated value of USD 12.60 billion. The SITE III Indefinite Delivery/Indefinite Quantity (IDIQ) contract will provide a centralized and coordinated IT acquisition facility to meet the global security requirements. The company’s total backlog had increased to USD 32.6 billion as of Q1FY21 (ending April 02, 2021) from USD 28.3 billion a year ago.

Q1FY21 Results: The company reported a 14.74% rise in total revenues to USD 3,315 million in Q1FY21 compared to USD 2,889 million in Q1FY20 (ending April 03, 2020), primarily due to a net increase in volume on various programs and benefit of USD 24 million in exchange rate movements. The Defense Solutions segment contributed 59.06%, the Civil segment contributed 23.10%, and the Health segment contributed the rest of the total revenues generated during the quarter. The company reported an increase in net income to USD 205 million in Q1FY21 compared to USD 115 million in Q1FY20.

LDOS 1QFY21 Financial Highlights (Source: Earnings Presentation, May 04, 2021)

Key Risks: The company generated 87% and 85% of the total revenues from the U.S. government in FY20 and FY19, respectively. The company’s reputation and its relationship with the U.S. government are the key factors for acquiring the projects. Any decline in business from the government departments/organizations could hurt the company's financial health. Any change in federal budgets due to macroeconomic or political conditions could also impact the company.

Outlook:

FY21 Guidance (Source: Earnings Presentation, May 04, 2021) 

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation

(Data Source: REFINITIV, Analysis by Kalkine Group)

* % Premium/(Discount) is based on our assessment of the company’s FY21E trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

LDOS Daily Technical Chart (Source: REFINITIV)

Stock Recommendation: LDOS's share price is largely similar to year-ago levels. It is currently trading in the slightly higher band of the 52-week range of USD 79.15 to USD 113.75. We have valued the stock using the EV/EBITDA multiple-based relative valuation method and arrived at a target price of USD 116.17. Considering the company’s excellent track record, recent contract wins and acquisitions, strong financials, and attractive valuation we recommend a "BUY" rating on the stock at the closing price of USD 102.75, down by 0.16% as of May 28, 2021.

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