The defense sector is lighting up with growth potential, driven by escalating defense spending and the integration of cutting-edge technologies into military operations. Amid this booming landscape, Leidos Holdings Inc. (LDOS) is perfectly poised to capitalize on the sector's dynamic momentum. But first, let us dive into the industry dynamics.
Technological advancements such as artificial intelligence are transforming modern warfare. When paired with immersive training programs involving augmented reality (AR) and virtual reality (VR), the sector is aligning itself with the most innovative technological trends, ensuring it stays ahead of the curve in global defense strategies.
That said, the U.S. government has rolled out a variety of supportive initiatives, with President Joe Biden making history by issuing the first-ever National Security Memorandum on Artificial Intelligence. This order directs the U.S. military and intelligence agencies to integrate and deploy artificial intelligence.
With a proposed budget of $850 billion for the Department of Defense in 2025, it’s clear that the government is committed to strengthening national security. Within this, the Air Force sector is set for substantial growth, driven by plans to replace outdated combat aircraft and introduce advanced unmanned aerial vehicles (UAVs).
In this rapidly evolving environment, LDOS shines as the standout choice for defense stock investments. With a stellar track record of government contracts and several high-profile project wins, the company is firmly positioned at the top of the ladder.
Over the past year, the stock has surged 28%, closing the last trading session at $141.96, signaling its strong market position and future potential.
Now, let us discuss the factors that could affect the stock’s growth trajectory.
Recent Developments
On February 3, LDOS announced a contract to deliver a new meteorological and oceanographic (MetOc) service for the Ministry of Defense (MOD) in support of the U.K.’s National Centre for Geospatial Intelligence.
Under the seven-year-long contract, the company will work to deliver a scalable MetOc data and services capability, THOR, providing the MOD with enhanced environmental insights. This move is expected to enhance LDOS’ market presence.
On January 30, LDOS announced securing a contract with NHS Supply Chain to provide cybersecurity services. The partnership supports the delivery of high-quality patient care across England and Wales. Over the course of the three-year contract, LDOS will work to strengthen the NHS Supply Chain’s cybersecurity framework.
This underscores LDOS' commitment to excellence and reinforces its leading position in the industry, potentially expanding the company’s presence in the cybersecurity market across both England and Wales.
Stable Historical Growth
Over the past three years, LDOS has demonstrated consistent growth across key financial metrics. Its revenue and EBITDA grew at a CAGR of 6.4% and 11%, respectively. Moreover, net income expanded at a CAGR of 15.6%, whereas its EPS grew at a CAGR of 17.2%.
Sound Financials
For the fiscal 2024 third quarter that ended September 27, 2024, LDOS’ revenues increased 6.9% year-over-year to $4.19 billion. Its non-GAAP operating income rose 34.4% from the year-ago value to $562 million.
Additionally, non-GAAP net income and non-GAAP EPS attributable to LDOS common stockholders grew 41.4% and 44.3% from the prior year’s quarter to $398 million and $2.93, respectively. As of September 27, 2024, the company’s cash and cash equivalents amounted to $1.19 billion, compared to $777 million on December 29, 2023.
Optimistic Analyst Estimates
Analysts expect LDOS’ revenue and EPS for the fiscal 2025 first quarter (ending in March) to increase 3% and 9.1% year-over-year to $4.09 billion and $2.50, respectively. In addition, the company exceeded the consensus revenue and EPS estimates in each of the four trailing quarters, which is impressive.
Looking at the full fiscal year ending December 2025, LDOS’ revenue and EPS are expected to rise 3.3% and 4.5% from the prior year to $16.97 billion and $10.57, respectively.
High Profitability
LDOS’ trailing-12-month EBIT margin of 10.83% is 3.7% higher than the industry average of 10.44%. Its trailing-12-month net income margin stands at 7.37%, 14.1% higher than the industry average of 6.46%.
In addition, the company boasts a trailing-12-month levered FCF margin of 7.03%, which is 2.9% higher than the sector average of 6.84%. Also, the stock’s trailing-12-month ROCE of 27.37% is 103.2% higher than the industry average of 13.47%.
Discounted Valuation
LDOS is currently trading at a forward non-GAAP P/E of 14.00x, which is 30.2% lower than the industry average of 20.06x. The stock’s forward EV/EBIT multiple stands at 12.49, 25.4% lower than the industry average of 16.74x.
Additionally, it has a forward Price/Sales multiple of 1.15, which is 25.8% lower than the industry average of 1.55x. This indicates that LDOS is undervalued compared to the broader market, offering potential upside for investors.
POWR Ratings Reflects Optimism
LDOS’ strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, which equates to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by taking into account 118 different factors, with each factor weighted to an optimal degree.
LDOS has a B grade for Quality, supported by profitability measures that exceed industry benchmarks. It also earns a B grade for Value, driven by its discounted valuation metrics relative to the industry average.
Within the B-rated Technology - Services industry, LDOS is ranked #3 out of 78 stocks. Beyond what is stated above, we have also given LDOS grades for Growth, Momentum, Sentiment, and Stability. Get all LDOS ratings here.
Bottom Line
LDOS has established itself as the top choice for the government to issue contracts and award new projects. The company’s robust portfolio of offerings that pertain to defense, aviation, and information technology is readily pushing the company’s growth momentum higher and could soon reach new heights.
Given LDOS’ robust financials, high profitability, and attractive valuation now could be the ideal time to consider adding the stock to one’s portfolio.
How Does Leidos Holdings, Inc. (LDOS) Stack Up Against Its Peers?
Although LDOS’ near-term outlook appears sound, it may be worthwhile to explore its industry peers, who also exhibit strong POWR Ratings. So, consider these A (Strong Buy) rated stocks from the Technology - Services industry:
Teradata Corporation (TDC)
NetScout Systems, Inc. (NTCT)
Key Tronic Corporation (KTCC)
To explore more A or B-rated Technology - Services stocks, click here.
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LDOS shares . Year-to-date, LDOS has declined -1.46%, versus a 2.68% rise in the benchmark S&P 500 index during the same period.
About the Author: Aritra_Gangopadhyay
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Aritra is a financial journalist dedicated to breaking down complex financial topics into simple, actionable insights. Holding a Master’s degree in Economics, he uses his analytical expertise to help investors uncover unique opportunities for long-term success.
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