Leveraging Cyber And Defense Solutions To Drive Robust Revenue And Margin Growth

Key Takeaways

• Strategic expansion in cyber and digital modernization and robust health services drive significant future revenue growth.
  
• Innovative defense solutions and financial strategies enhance revenue growth and earnings stability.
  
• Shifts in government budgets and competitive pressures could threaten revenue growth and margins, particularly in the National Security, Digital, and Health segments.

Catalysts

Provides services and solutions in the defense, intelligence, civil, and health markets in the United States and internationally.

• Leidos is leveraging its core competencies and expanding its business capture in high-growth areas such as full-spectrum cyber and digital modernization, which are expected to significantly enhance future revenue streams.
  
• The Health and Civil segment is experiencing robust performance fueled by increased demand for managed health services, particularly due to the PACT Act's permanent expansion of the eligible population. This provides a solid foundation for sustained revenue and margin growth.
  
• The successful development and scaling of innovative defense solutions, such as the IFPC Enduring Shield and small glide munitions, position Leidos for substantial future revenue growth within its defense systems portfolio.
  
• Strategic share repurchases and increased dividends are enhancing earnings per share (EPS), while also reflecting management's confidence in ongoing cash generation and future earnings stability.
  
• The recent focus on improving the backlog quality and size, with a book-to-bill ratio of over 1.9x, indicates strong revenue growth potential, supported by $8.1 billion in net bookings and a total backlog of $40.6 billion.

Leidos Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Leidos Holdings's revenue will grow by 3.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 7.4% today to 7.1% in 3 years time.
• Analysts expect earnings to reach $1.3 billion (and earnings per share of $9.63) by about October 2027, up from $1.2 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 22.8x on those 2027 earnings, up from 20.9x today. This future PE is lower than the current PE for the US Professional Services industry at 27.8x.
• Analysts expect the number of shares outstanding to grow by 0.17% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.53%, as per the Simply Wall St company report.

Leidos Holdings Future Earnings Per Share Growth

Risks

• The company faces potential risks associated with shifts in budgets and priorities for its intelligence community customers in the National Security and Digital segment, which may impact revenue growth.
  
• Despite strong past performance, there are uncertainties around future Health and Civil segment contracts, especially regarding competitive recompete processes which could pressure revenue and margins.
  
• There are continued risks of protests on contract awards, particularly in the National Security and Digital segments, which could delay revenue realization and impact the backlog.
  
• The company operates in a competitive market for its Managed Health Services, where high profitability could attract more entrants, potentially impacting future margins.
  
• Potential government budget constraints or fiscal disruptions, especially in defense spending amid an election year, may negatively impact revenue growth and pipeline conversion.

Valuation

• The analysts have a consensus price target of $182.07 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 $218.0, and the most bearish reporting a price target of just $145.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $18.3 billion, earnings will come to $1.3 billion, and it would be trading on a PE ratio of 22.8x, assuming you use a discount rate of 6.5%.
  
• Given the current share price of $185.86, the analyst's price target of $182.07 is 2.1% lower. 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.