Leidos Holdings: Sturdy Development, Stable Share Buybacks, Insider Shopping for Exercise (NYSE:LDOS)

Leidos Holdings, Inc. (NYSE:LDOS) has proven sturdy monetary efficiency over the previous few quarters, with the share worth rising almost 40% since February.

On this article, I’ll revise their latest monetary outcomes, together with a number of the headwinds of their worldwide phase, together with a $39 million write-down within the UK market.

I’ll analyze the latest insider shopping for exercise, and their share buyback program, in addition to their up to date full-year steering.

Within the outlook part, I’ll present all the small print that led to my purchase score. For now, I’ll begin with an organization overview part for these new to this inventory.

Firm Overview

Leidos is a US-based firm that gives know-how options and providers to the protection, civil, and well being markets.

About 87% of its income in 2023 got here from US authorities businesses, together with the US Division of Protection, US Intelligence Neighborhood, Federal Aviation Administration, and NASA.

They function by three enterprise segments:

• Protection: This phase consists of providers in digital modernization, command and management methods, intelligence, surveillance, reconnaissance applied sciences, mission operations, and house options. That is their fundamental phase, representing 56% of the overall income in 2023.
• Civil: this phase is concentrated on modernizing infrastructure, methods, and safety for civil authorities and business shoppers.
• Well being: this phase consists of options for federal healthcare clients, providing well being info administration providers, life sciences R&D, managed well being providers, and digital transformation in healthcare.

I thought-about together with under a abstract of the income per enterprise phase from their newest annual report.

Click on to enlarge

Creator’s compilation from the newest 10-Ok.

Most of their income comes from the US, though 9% of the overall annual income in 2023 got here from worldwide clients (a mixture of authorities and business clients), primarily from the UK and Australia.

When it comes to the corporate’s possession, their newest 14A submitting exhibits that each one 26 administrators and govt officers collectively personal 0.96% of the frequent inventory. As it’s possible you’ll know, my funding fashion favors firms the place administration has important pores and skin within the recreation. In my opinion, 0.96% possession is a small stake within the firm.

That mentioned, I am glad to see no massive personal fairness companies as 5% house owners, which provides administration extra management in working the corporate.

Latest Efficiency

Let’s begin with the headwinds.

Leidos took a $39 million write down in its UK enterprise because of points with two contracts. These contracts confronted delays because of altering buyer necessities and schedule slippage, resulting in an working margin for the worldwide phase of -2%.

To place issues into context, in the identical quarter final yr, the worldwide phase had a optimistic working margin of 6.2%.

If we do not consider the write-down within the UK enterprise, the general phase would have proven an working earnings margin of 8%. So, if administration kinds out the execution dangers within the UK, margins within the worldwide phase may enhance in comparison with final yr.

The opposite strain comes from uncertainties with the veterans advantages administration (VBA) contract.

The VBA is dealing with funding challenges associated to its caseload pushed by the PACT Act, which expanded advantages for veterans. In response to budgetary pressures, the VBA has diminished staffing, resulting in decrease case volumes for contractors like Leidos.

Moreover, the VBA contract, which is a serious contributor to the expansion of the Well being & Civil segments, is approaching a recompete part. Administration expects the recompete course of to happen in late 2024, though no formal RFP has been issued but. This makes me sweat, as the end result of this recompete may considerably affect Leidos’ future income on this phase.

Apart from these headwinds, the outcomes of their second quarter have been primarily favorable, beating each EPS and income estimations.

Income elevated by 8% YoY, reaching $4.1 billion. The important thing phase behind this improve in development was the Well being & Civil phase, with a 22% YoY improve in income.

Their different two segments skilled mid to low single-digit development.

In regard to their profitability, the Well being & Civil phase noticed a serious bounce in working margins from 13.0% to 24.3%.

In response to a great quarter, administration raised full yr 2024 steering. Notably, they raised the decrease finish of the income steering by $100 million, and non-GAAP diluted EPS steering to a spread of $8.60 to $9.00, from the earlier vary of $8.40 to $8.80.

Outlook

Let’s begin with worth motion. The weekly chart under exhibits a bull run since February 2024, with the share worth rising near 40% since breaking the $110 resistance stage.

The RSI signifies indicators of overbuying exercise, which raises considerations given the steep rise within the share worth over such a short while span.

This sharp improve is smart based on the financials, provided that the corporate beat each EPS and income estimations, as proven under.

Moreover, each EBITDA and working earnings have been rising persistently since Q1 2023.

In regard to their money stream assertion, they’d optimistic free money stream since Q2 2023, which I see as a really wholesome signal.

In regard to their debt, each the fast and present ratios are above 1, and debt to property is 0.4, which signifies to me that they’re properly positioned to repay each brief and long-term liabilities.

In regard to their share buyback program, administration has dedicated to repurchasing $500 million in shares by year-end, with half of this already accomplished by Q2. This was accompanied by an insider shopping for exercise by the CEO, Bell Thomas Arthur, of $248,305 on August 1.

In my opinion, administration is assured within the present share worth, regardless of the overbuying indication within the RSI.

This, coupled with good monetary outcomes prior to now quarters, motivates my Purchase score for this inventory. Nevertheless, I’ve to say that I have not purchased any shares within the firm but, as I imagine there’s a threat with the recompete part of the VBA program. If this threat is materialized, I imagine the share worth may drop considerably. So, I like to recommend having a more in-depth have a look at the standing of the VBA recompete part within the subsequent earnings releases.

Conclusion

To conclude, I imagine Leidos has proven sturdy monetary efficiency over the previous quarters, notably in its Well being & Civil segments. Nonetheless, there are some uncertainties across the VBA contract recompete, and the challenges with their UK contracts.

Nevertheless, regardless of these considerations, the insider shopping for exercise by the CEO, the raised full-year steering, and the $500 million share repurchase program make me imagine that administration is assured within the present share worth, regardless of an overbuying indication within the RSI.

Subsequently, I keep a Purchase score for this inventory, and I like to recommend monitoring the VBA recompete intently, because it may considerably affect the share worth.