Leidos: Engineering, Defense and Airport Security

02/11/2020 5:00 am EST

Focus: INDUSTRIALS

Richard Moroney

Editor, Dow Theory Forecasts

Leidos Holdings (LDOS) ended 2019 on a positive note, generating all-time highs in revenue and bookings, while its backlog rose to a record $23.9 billion, notes Richard Moroney, editor of Dow Theory Forecasts.

Leidos, a provider of technology and engineering services that generates 85% of its revenue from the federal government, wasn’t just a one-quarter wonder. Over the last 12 months, Leidos increased sales 7%, per-share profits 14%, and operating cash flow 12%.

These gains reflect a series of new government contracts as well as renewals, including a Transportation Security Administration contract to oversee screening at about 450 airports, a deal potentially worth $926 million over the next five years. Leidos has a history of augmenting its growth with acquisitions.

Earlier this month, the company agreed to pay $1 billion to acquire a security detection and automation businesses from L3Harris Technologies (LHX) and completed its $1.65 billion acquisition of Dynetics, an all-cash deal first announced in December. Leidos plans to release December quarter results on Feb. 18.

The consensus projects revenue growth of 8% and per-share-profit growth of 22% to $1.35. Analysts target sales growth of 8% and profit growth of 14% in 2020, followed by gains of 6% and 9%, respectively, in 2021.

The company has a history of exceeding expectations, posting better-than-expected profits in each of the last eight quarters. Despite posting total returns of 35% over the last six months and 74% over the last year, Leidos remains reasonably valued at 20 times expected 2020 earnings.

The stock also sports discounts to the industry based on price/sales, price/free-cash-flow, and enterprise-value/EBITDA ratios.

Leidos certainly seems happy with the price of its own shares, buying back $200 million worth in the September quarter alone as part of an accelerated repurchase program. Leidos seems capable of outperforming over the next 12 months.

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