LDOS - Leidos- May Be Close To An Intermediate Peak

2024-06-26 17:11:06 ET

Summary

• LDOS which benefits from strong barriers to entry in heavily regulated industries has done very well this year generating close to 2.5x the return profile of the S&P 500.
• After a strong run, we feel the price action looks overextended and the stock could do with a pullback.
• Valuations don't look cheap either on an EV/EBITDA basis, whilst the Q1 record EBITDA margin performance may not be repeated in the medium term.
• Some of the key divisions could see a slowdown in H2, whilst higher CAPEX commitments may weigh on some of the expected improvements in operating cash flow.
• Leidos has been paying dividends for over a decade, but the current dividend picture doesn't look too appealing.

Introduction

Leidos Holdings ( LDOS ), with over five decades of existence, is a Fortune 500 entity that has been leveraging its expertise in multiple disciplines, ranging from science, tech, engineering, etc. to deliver mission-critical services for industries that are heavily regulated (defense, health, etc.). Needless to say, given the inherently sensitive nature of the work involved in these industries, getting your foot in the door as a service provider, and then continuing to grow your backlog from these avenues, calls for a heightened degree of expertise (LDOS’s backlog, which covers expected revenue from negotiated contracts is currently growing at 4%, and stands at $36.6bn....

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