In the competitive arena of defense contracting, few companies are as influential as Leidos Holdings (NYSE: LDOS). Based out of Virginia, this technology titan has carved a niche for itself, offering crucial solutions to government bodies and commercial clients alike.
Leidos operates at the forefront of numerous sectors, spanning from cybersecurity and artificial intelligence to healthcare services and logistics. Its reach permeates almost every facet of national security and everyday infrastructure.
Recently, their stock has experienced quite the wild ride.
Illustrated by the chart above, the stock had an impressive climb to over $200 in late 2024, driven by intensified global security concerns. However, by the end of the year, a significant drop brought the shares below $150. Despite a brief sell-off yesterday, attributed more to sector-wide issues than to anything specific about Leidos, the stock seems to be stabilizing.
Turning to their latest financial performance, there are many positive aspects to highlight. Leidos recently unveiled an impressive third quarter, boasting a 7% year-over-year revenue increase to $4.19 billion. Even more remarkable was an adjusted EBITDA margin of 14.2%—a new high that underscores the company’s strides in operational efficiency.
Adding to the positive outlook, Leidos generated a strong free cash flow of $633 million and racked up $8.1 billion in new bookings, swelling its total backlog to an impressive $40.6 billion.
The recent moves by the management also reflect strong confidence in their operations. They raised the quarterly dividend by 5.3% and have completed $450 million of their intended $500 million stock repurchase plan for the year.
In exciting contract news, Leidos secured two significant deals this week: a $120 million cybersecurity contract with the Department of Defense and a $2.6 billion agreement to service Transportation Security Equipment across over 430 airports in the U.S.
While there might be broader concerns about the defense sector, Leidos itself is on a solid footing.
This scenario perfectly illustrates the utility of The Value Meter in guiding us through a barrage of information.
From a valuation perspective, Leidos trades at an enterprise value-to-net asset value (EV/NAV) ratio of 5.39. This is roughly 26% below the industry average of 7.33 for companies with positive net assets, suggesting at first glance that the stock is undervalued.
Yet, its cash-generating prowess paints a slightly different picture. Over the last four quarters, Leidos has averaged a free cash flow of 7.04% of its net assets, a bit shy of the peer average of 7.9%.
In essence, although Leidos appears discounted compared to its peers, the lower cash generation somewhat explains the reduced price. It’s not an overpriced stock by any stretch, but it doesn’t exactly scream “Buy me!” at current levels.
For those eyeing a stake in the defense and government services arena, Leidos offers a reasonable entry point with its proven delivery abilities and extensive backlog. Just don’t expect a steal at this valuation.
According to The Value Meter, Leidos is “Appropriately Valued.”
Lastly, what stock would you like to see evaluated next on The Value Meter? Feel free to drop the ticker symbols in the comments.
