Leidos Holdings Inc.

LDOS Details

Leidos Holdings Inc. (NYSE: LDOS) is engaged in providing digital modernization, cyber operations, mission software systems, integrated systems, health information management systems, and mission operations primarily to various government entities and their agencies. Their main customers include 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 many other U.S. civilian, state, and local government agencies. As of 15^th April 2021, the company’s market capitalization stood at USD 14.29 billion.

LDOS Backlog Profile (Source: Company Presentation, Q4FY20)

Continued Contract wins to add to the backlog: On 1^st April 2021, LDOS secured an indefinite-delivery, indefinite-quantity (IDIQ) USD 7.73 billion IT services contract to help modernize the Naval Marine Corps intranet. The contract will have a five-year base period and, if all options are employed, it could go on until August 2028. As of FY20, the company’s total backlog was USD 31.9 billion.

FY20 Results: The company reported 11% growth in the topline to USD 12.30 billion in FY20 as compared to that of USD 11.09 billion in FY19. The company’s 60% of the revenue comes from the Defense Solution segment, 24% comes from the Civil Segment and the rest comes from the Health segment. The company delivered 10%+ EBITDA margins for the last 4 consecutive years.

Key Risks: There is intense competition on obtaining government agency contracts, with many majors vying for a share of the pie. Failure to secure projects could affect the company’s cash flows and profitability. Further, since the main customers of the company are the US Government and its agencies, any significant effect on the federal budget process due to macroeconomic or political conditions can hurt the financial health of the company.

Outlook: The company is expecting its FY21 revenue to be in the range of USD 13.7 billion to USD 14.1 million. It is also estimating adjusted EBITDA margins to be in the breadth of 10.3% to 10.5%. This is because the majority of the LDOS business continues to be regarded as essential by its clientele. The impact of the Covid-19 outbreak is likely not to be very severe because of this critical nature of its business.

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group 

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

Stock Recommendation: The company recently acquired L3Harris Technologies' (NYSE: LHX) to expand its customer penetration into 75 additional countries. This transaction is projected to be immediately accretive to the company’s revenue growth. LDOS corrected 4.84% in the past 3 months and it is currently leaning towards the mid-point 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 116.27. Considering the correction in the past three months, current trading levels, recent contract wins and acquisitions, and strong financials we recommend a “BUY” rating on the stock at the closing price of USD 101.12, up by 1.01% as of 15^th April 2021.

LDOS Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Cirrus Logic Inc.

CRUS Details