NorthStar 2030, Energy, And Cyber Investments Will Create Broader Opportunities

Key Takeaways

• Growth in space, maritime, and energy sectors, alongside cyber capabilities, suggests potential for increased revenue and competitive strength.
  
• Digital modernization and expanded health services aim to enhance margins and earnings through efficiency and broader market engagement.
  
• Macroeconomic pressures, administration policy shifts, and contracting changes create uncertainties that could hinder Leidos' revenue growth and profitability.

Catalysts

Provides services and solutions for government and commercial customers in the United States and internationally.

• The NorthStar 2030 Strategy outlines key growth pillars such as space and maritime, which are expected to provide disruptive hardware products to the U.S. military, potentially boosting future revenue.
  
• Expansion of the energy infrastructure business aims to make the electrical grid more resilient and secure, suggesting potential revenue growth through increased demand for engineering and IT services.
  
• Investment in digital modernization and cyber initiatives emphasizes building scalable, secure IT infrastructures, which could lead to higher margins and increased earnings through more efficient operations.
  
• The acquisition and integration of a company in full-spectrum cyber capabilities is set to strengthen Leidos' position in the cyber market, potentially increasing revenue and margins through enhanced competitive offerings.
  
• Managed health services are identified as a growth area, with plans to expand services and populations served, likely leading to increased revenue and sustaining high operating margins.

Leidos Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Leidos Holdings's revenue will grow by 2.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.9% today to 8.0% in 3 years time.
• Analysts expect earnings to reach $1.5 billion (and earnings per share of $12.0) by about May 2028, up from $1.3 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.4x on those 2028 earnings, up from 14.9x today. This future PE is lower than the current PE for the US Professional Services industry at 21.2x.
• Analysts expect the number of shares outstanding to decline by 4.8% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.95%, as per the Simply Wall St company report.

Leidos Holdings Future Earnings Per Share Growth

Risks

• The ongoing adjustments made by the new administration, particularly with the GSA's consulting review, may introduce uncertainties and possible disruptions which could negatively impact segments of Leidos' revenue.
  
• The current macro environment, described as intensified, might lead to unforeseen risks impacting net margins and bottom-line performance despite recent successes.
  
• The low backlog conversion rate evidenced by suboptimal book-to-bill ratios in recent quarters could potentially slow future revenue growth, creating challenges to sustaining the current earnings momentum.
  
• Potential impacts from the macro environment and client-side budget constraints due to federal reconciliation measures and prioritization shifts could hinder revenue growth and profitability.
  
• Upcoming changes in customer contracting terms and expectations, prompted by the emphasis on cost reduction and commercial terms, might pressure future earnings and affect profit margins if not managed well.

Valuation

• The analysts have a consensus price target of $167.475 for Leidos Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $189.0, and the most bearish reporting a price target of just $148.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $18.4 billion, earnings will come to $1.5 billion, and it would be trading on a PE ratio of 15.4x, assuming you use a discount rate of 7.0%.
  
• Given the current share price of $154.75, the analyst price target of $167.47 is 7.6% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.