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

Cirrus Logic (NASDAQ: CRUS) is a supplier of low-power, high-precision signal processing systems for mobile and consumer applications. It is involved in the development and marketing of analog, mixed-signal, and audio DSP integrated circuits (ICs). The company operates under two product lines namely, Portable Products and Non-Portable and Other products. As of 15^th April 2021, the company’s market capitalization stood at USD 4.93 billion.

Technological Innovation: On 24^th March 2021, the company introduced its newest flagship CS35L45 boosted amplifier for a more entrancing audio experience from smartphones, tablets, and mobile gaming devices. It delivers a higher jaunt for high peak loudness, improved dynamic range for more treble and bass precision, less noise, and more tonal balance at all volume levels. The Y-bridge output driver of the CS35L45 boosted amplifier allows higher efficiency in receiver and speaker modes for longer battery life.

Robust Q3FY21 Results: The company reported 29.7% growth in its topline to USD 485.79 million in Q3FY21 (three months ended December 26, 2020) as compared to that of USD 374.66 million in Q3FY20. Revenues from Portable Products increased by USD 105.41 million as compared to Q3FY20, primarily driven by significant growth in unit volumes for smartphones components. Revenues from the Non-portable Products increased by 19.1% YoY to USD 35.5 million. The company reported 67% growth in the bottom line to USD 114.36 million in Q3FY21 as compared to that of USD 68.51 million in Q3FY20.

CRUS Annual Revenue (Source: Company Presentation, February 1, 2021)

Key Risks: Purchases by Apple represented 87% and 83% of the company’s total net revenues for Q3FY21 and Q3FY20, respectively. The company’s top 10 largest end customers represented approximately 94% and 93% of its net sales for the first nine months of FY21 and FY20, respectively. Partial or total loss of business from major customers might result in a considerable decline in revenues for the company. It could also impact the financial as well as operational health of the company. 

Outlook: For 4QFY21, CRUS anticipates revenues to be in the range of USD 280 million and USD 320 million, depicting a rise of 7.5% YoY, at the mid-point. GAAP gross margin is expected to be in the range of 50% to 52%. A strong balance sheet (no debt obligations) places the company well to sail through the COVID-19 induced turmoil and leverage growth opportunities.

Valuation Methodology: Price/Earnings 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: CRUS has corrected 13.01% in the past 3 months and is currently leaning toward the mid-point of the 52-week range of USD 55.30 to USD 103.25. We have valued the stock using the Price/Earnings multiple based relative valuation method and arrived at a target price of USD 98.60. Considering the correction in the stock price in the past three months, current trading levels, solid margins, and decent fundamentals we recommend a "BUY" rating on the stock at the closing price of USD 84.85, up by 0.94% as of 15^th April 2021.

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