Leidos: Defending Your Portfolio – Leidos Holdings, Inc. (NYSE:LDOS)

Your One-Stop Spot For Diversification, Growth, And A Respectable Dividend

Leidos Holdings (LDOS) specializes in 4 key lines of business — civil, defense, health, and intelligence. The company has seen significant growth, nearly doubling in less than a year at all-time highs, but has since pulled back considerably due to the macroeconomic fears of the virus pandemic. This pullback opens up a tremendous opportunity for long-term investors over coming years. The stock’s expansive portfolio touches nearly every market, offering investors reduced risk through diversification in what has been tough times for just about every sector. This, along with industry-leading growth and an approximately 1.7% dividend yield, makes Leidos a strong buy at these prices in my opinion (Figure 1).

(Figure 1) Leidos Is Positioned In A Variety Of Markets Such As Defense, Civil, and Health Which Along With Strong Cash Generation Sets The Company Up Well For Even The Toughest Macroeconomic Conditions

Valuation

Growth

Leidos being as diversified of a company as they are can be rather difficult to truly valuate. The best way to reach a consensus on where they may be heading is by looking at similar peers such as Science Applications International (SAIC), CACI International (CACI), and L3Harris Technologies (LHX). Compared to these competitors, Leidos has been a historical industry leader in growth and still has the potential to continue this trend going forward (Figure 2). Their ongoing defense contracts, as well as an increased need for data analytics technologies particularly in the health sector, will help to fuel growth going forward.

ChartData by YCharts

(Figure 2) Leidos Holdings Leads Competitors In Growth Metrics Such As YoY EBITDA Growth and Return On Equity

Value

One of the biggest downsides of investing in Leidos was the heightened valuation. This pullback due to virus fears has virtually thrown that out the window, cutting the price to earnings ratio of the stock nearly in half, down to around 16x earnings. This relatively fair valuation has not gone unnoticed as Wall St. analysts position themselves behind LDOS recommending to buy the stock as of March (Figure 3).

(Figure 3) Buy Ratings Flood In To LDOS As The Stock Pulls Back To Early 2019 Prices

This reevaluation of the stock also brings the dividend back to a hefty 1.7%, not too bad for a stock with plenty of potential for growth. Once virus fears blow over in coming months, the next test Leidos’ stock will have to face is the presidential race of 2020. The valuation of LDOS could be positively affected if Republicans remain in office due to their focus on defense or negatively affected if Democrats take over. Only time will tell the magnitude of this effect on the stock but should be kept in mind for short-term investors.

Overall, I do see the potential for Leidos to come back and reach all-time highs around the $120 mark once again by the end of 2020 if virus fears pass and if Republicans hold the office. That, along with a macroeconomic turnaround that is bound to happen in due time, offers plenty of catalysts for the ~65% upward swing to occur in the next year or two.

Diversification and Positioning

Leidos Holdings has seen an around 40% dip in less than 8 weeks due to the market pullback. I believe because of the company’s complex diversification, this stock is rather oversold. With that being said, there is still room for downside with fears still looming, but because of the company’s positioning in the healthcare sector, I do not believe we will see a huge dip in earnings in comparison to how much the stock has pulled off from highs. Their healthcare analytics will prove to be more helpful than ever with what we are currently facing and their digital workplace technologies will be crucial to employees forced to work from home. The market seems to be overlooking the amount of diversification Leidos has within their portfolio and this creates opportunities for profit going forward.

Risks

Leidos Holdings does have over $3 billion in debt, but most of that being long-term debt, it does not pose a significant problem unless market woes drag on much longer than currently expected.

Another aforementioned risk is if Democrats were to take over office in November. This could put a cut in the nation’s defense budget which would cause a small blow to Leidos’ upside potential.

Finally, the current macroeconomic headwinds caused by the coronavirus still pose a downside threat to the stock. I do not see this being an issue for long-term investors; in fact, it allows for the opportunity to average down for even better entry prices as there appears to be little correlation with the fall of the stock price and the actual shift in incoming revenue. Short-term investors may want to steer clear, though, as both the technology and defense sectors have been taking a blow of late and Leidos is just one of those stocks always in the line of impact.

Therefore, if worst comes to worst and coronavirus fears persist beyond summer and Democrats secure office potentially cutting defense budgets, this stock could test lows around the $50 range that has held since 2017. I do not see this happening with the company’s diverse portfolio and solid business model, but I am sure very few people saw what has been an approximately 40% drop coming months ago and therefore the most downside I see LDOS potentially having in the next year is ~-30%.

In Conclusion

At this lowered valuation, Leidos Holdings holds significant risk-reward potential in my opinion. Offering upsides of as much as 65% in the coming years and downsides no more than 30%. Heightened market volatility opens up plenty of buying opportunities and LDOS is one of the most diversified high growth stocks out there that still offers a nice dividend. Their strides in cybersecurity and data analytics will play an important role in the ever-changing modern world for years to come. Their acquisition of Dynetics (Figure 4) will further expand their capabilities in this area and add to the growth opportunities at hand.

(Figure 4) Dynetics Was Recently Acquired By Leidos And Offers Further Possibilities Within The Security And Intelligence Sectors

The key to making the most of this pullback will be to average down and have patience. This turnaround will not happen overnight, but Leidos could easily return to all-time highs within the next 1-2 years and be a strong defender of your portfolio in what has been a rough couple months for the broader market.

Disclosure: I am/we are long LDOS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Markets are extremely volatile in the current condition. Use my analysis as a resource and invest with your own due diligence.

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