Leidos Holdings Inc. LDOS recently revealed that it has entered into a partnership with the University of Edinburgh to drive artificial intelligence (AI) and data science innovation in the United Kingdom. This should further strengthen LDOS’ position in the UK, with the company already being one of the forerunners in delivering innovation and advantage to this nation’s organizations, such as Defence Intelligence.
The latest collaboration will allow Leidos to utilize its Trusted Mission AI solutions with the help of the University of Edinburgh’s research excellence to address critical challenges in areas such as environmental, civil and healthcare, as well as national security.
With AI having emerged as a key technology in the development of data science and Leidos being a prominent supplier of data solutions across diverse sectors ranging from cybersecurity to software development, this latest partnership might lure investors to add this stock to their portfolio. However, to assert if it would be profitable to buy LDOS shares right now or wait for a better entry point, let’s delve deeper into the stock’s year-to-date performance, long-term prospects as well as risks (if any) to investing in the same. The idea is to help investors make a prudent decision.
LDOS Stock Outperforms Industry, Sector & S&P500
Leidos Holdings Inc.’s (LDOS) shares have surged an impressive 46.7% in the year-to-date period, outperforming the Zacks Aerospace-Defense industry’s loss of 10% as well as the broader Zacks Aerospace sector’s decline of 1.2%. They have also outpaced the S&P 500’s rise of 23.4% during the same time frame.
A similar stellar performance has been offered by other defense players, such as RTX Corp. RTX, Lockheed Martin LMT and General Dynamics GD, whose shares have witnessed a surge of 41.9%, 17.1% and 10.1%, respectively, year to date.
Leidos’ YTD Performance
Image Source: Zacks Investment Research
What Pushed LDOS Stock Up?
Leidos Holdings enjoys a continuous flow of orders for its varied cost-effective defense products, which range from technology-enabled services and mission software capabilities in the areas of cyber and security operations to advanced space, aerial, surface, and sub-surface manned and unmanned defense systems. Such order flow culminates into a solid backlog count, which, in turn, bolsters LDOS’ revenue generation prospects. Impressively, the company recorded a backlog of $40.56 billion at the end of September 2024 compared with the prior-quarter figure of $36.49 billion.
A solid financial position enables LDOS to invest in research and development, allowing it to innovate advanced defense products in the near future. Cash and cash equivalents totaled $1.19 billion at the end of September 2024, which improved sequentially and also came in much higher than its current debt of $0.59 billion. So, we may safely conclude that the company holds a strong solvency position, at least in the near term. Such a strong solvency position can be expected to have boosted investors’ confidence in this stock, as evident in its year-to-date share price surge.
Is LDOS Stock’s Growth Sustainable?
Growth prospects for the global defense industry remain bright, backed by emerging geopolitical tensions that have led to a massive spike in weapons stock depletion and increased defense spending from both developed and developing nations worldwide. To this end, it is imperative to mention that these nations are deploying data analytics and AI capabilities to their defense systems for superior battlespace awareness. Hence, the stage is set for a stable growth trajectory for S&P 500 defense stocks like Leidos Holdings, which boasts extensive experience in airborne operations as well as intelligence, surveillance, and reconnaissance with diverse armed services across the globe.
LDOS has a long-term (three-to-five-year) earnings growth rate of 14.8%.
A quick sneak peek at its near-term earnings and sales estimates mirrors a similar picture.
LDOS’ Upbeat Estimates
The Zacks Consensus Estimate for LDOS’ 2024 and 2025 sales suggests an improvement of 6% and 3.7%, respectively, year over year.
The Zacks Consensus Estimate for 2024 and 2025 earnings per share has moved north 9% and 7.4%, respectively, over the past 60 days. The upward revision in earnings estimates indicates analysts’ increasing confidence in the stock.
Image Source: Zacks Investment Research
Image Source: Zacks Investment Research
Risks to Consider Before Choosing LDOS Stock
Despite the aforementioned growth opportunities, there are certain challenges in the industry that one should consider before investing in LDOS. One such headwind is the persistent supply-chain shortage that has been plaguing the defense industry and its players like Leidos Holdings. In particular, the shortage of critical materials, such as semiconductors and rare earth elements, which are essential for defense technologies, along with too much global reliance on a handful of nations like China and Russia, has added fuel to the acute supply-chain imbalance that occurred during the pandemic.
Although the effects of the pandemic have almost worn out, the other challenges mentioned above are not likely to disappear anytime soon. So, the adverse impact of the supply-chain shortage is expected to continue to remain a threat for defense contractors like LDOS, at least in the near term.
LDOS Stock Trading at a Discount
In terms of valuation, LDOS’ forward 12-month price-to-earnings (P/E) is 15.86X, a discount to its industry’s average of 21.20X. This suggests that investors will be paying a lower price than the company's expected earnings growth compared to that of its industry.
Image Source: Zacks Investment Research
What Should an Investor Do?
To conclude, investors interested in LDOS may add this stock to their portfolio, considering its discounted valuation, long-term growth prospects, and upbeat near-term sales and earnings estimates.
LDOS currently has a VGM Score of A, which is also a favorable indicator of strong performance. The company’s Zacks Rank #1 (Strong Buy) further supports our thesis. You can see the complete list of today’s Zacks #1 Rank stocks here.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
