Leidos Is A Diverse Low Volatility Play With Asymmetric Risk-Reward
Summary
- Leidos offers around 15-20% upside due to current valuation in comparison to peers while also offering a similar 15-20% downside when charting levels of support.
- The company offers a wide range of solutions in a number of categories such as defense, health, and technology.
- Catalysts that could move the stock include upcoming earnings and continuous acquisitions of government defense contracts.
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Leidos Provides An Asymmetric Risk-Reward At Current Levels
Leidos Holdings (NYSE:LDOS) has done well over the last year of trading moving up around 23% over the same period. Leidos specializes in providing services and solutions in the defense, intelligence, civil, tech, and health markets in the United States and internationally. It operates through three segments: Defense Solutions, Civil, and Health. The Defense Solutions segment offers national security solutions and systems for air, land, sea, space, and cyberspace for a number of U.S. customers. The Civil segment provides systems integration services to air navigation service providers. The Health segment offers solutions to federal and commercial customers responsible for health and well-being of people worldwide (Figure 1). The company was founded in 1969 and is headquartered in Reston, Virginia. Since our last bullish update, the stock has returned around 43% upside offering diversification in what has been a volatile tech industry since COVID-19 struck.
Figure 1. The excerpt from the company's website above shows the wide range of offerings from Leidos
At current prices, Leidos' valuation could offer a potential upside of as much as 15%+ from current prices based upon comparisons to peers as well as Wall Street Analysts and while also offering 15%+ downside if support holds up through any macroeconomic headwinds. This presents a rather neutral investment opportunity going forward for the stock over the next year or so timeframe. Acquiring new large government contracts is one of the greatest catalysts for LDOS stock and these types of federal awards could be sustained as Biden will likely bring a similar defense budget to Trump's prior plans.
Current Valuation
Leidos currently trades at a Price to Earnings ratio of 15.3x earnings. This is slightly lower than peers indicating the stock is trading at a ~20%+ discounted value in comparison to competitors. Leidos also tends to have conservative projections as the company has been known to continually beat on EPS earnings again and again.
Figure 2. LDOS trades around 20-40% discounted from peers when looking at forward PE ratios
Looking more towards growth we see that Leidos is growing at around 14% annually. This is again slightly faster than their competitors who on average are only growing revenue at an approximately 8% clip. Keeping an eye on this metric will be crucial during earnings going forward to propel the stock beyond analysts' expectations.
Wall Street Analysts are behind Leidos for the most part, with an average analyst rating of $116.30 signaling just over 15% upside from current prices (Figure 3).
Figure 3. Leidos has a number of bullish analysts behind them as well hinting at significant returns ahead
This combination of value, momentum, growth, and earnings consistency, along with a 1.44% dividend yield makes a strong case for Leidos's stock going forward.
Risks
Leidos currently has a debt of approximately $5 Billion with most of that being long-term debt and the remaining short-term debts. This is a large number but does not look to be a huge issue going forward due to the size of the company and their cash on hand, but should be monitored going forward as always.
Based upon historical data and when looking at the charts of Leidos' stock it becomes apparent that there is a fairly strong line of support around the $76 mark (Figure 4). This would indicate as much as 15%+ downside risk going forward barring any further macroeconomic headwinds.
Figure 4. The graphic above shows the levels of support and resistance for LDOS via WeBull
Investment Summary
Leidos' stock offers a unique investment combination with both value and diversification at current prices. An asymmetrical risk reward of 15-20% upside vs. downside at current prices makes it a neutral opportunity in our view and therefore would get a hold rating.
Cybersecurity and AI will be crucial points in maintaining growth for Leidos over coming years. Earnings are set to be announced on the 2nd of November and this will give us another peek into growth and forward projections. With defense stocks being rather muted since Biden took office this stock will likely hold fairly steady for the foreseeable future and therefore we recommend seeking higher upside opportunities for the time being.
This article was written by
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