NorthStar 2030 Will Focus On IT Modernization And Increased Privatization, Aligning With Administration Priorities

Key Takeaways

• Leidos' NorthStar 2030 strategy emphasizes IT modernization, privatization, and war-fighting capabilities, aligning with priorities for future revenue growth.
  
• Strong backlog and fixed-price contract increases support expected earnings growth and improved net margins, while share repurchases enhance EPS.
  
• Emerging competition and potential budgetary disruptions, alongside financing challenges, pose risks to Leidos' revenue growth, margin stability, and short-term earnings.

Catalysts

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

• Leidos’ new growth strategy, NorthStar 2030, focuses on specific growth pillars such as IT modernization, transformational war-fighting capability, and increased privatization, which are expected to align with administration priorities and drive future revenue growth.
  
• The transition of nearly 330,000 additional users to the Defense Enclave Services program represents significant future growth potential, which is expected to enhance cost efficiency and improve earnings by moving existing users onto a unified IT network.
  
• The company’s strong backlog, including new multibillion-dollar contracts with the VA and TSA, alongside a $4.1 billion IDIQ for IFPC Enduring Shield Air Defense System, sets a strong foundation for future revenue and earnings growth.
  
• Leidos anticipates higher profitability through increasing the mix of fixed-price contracts, which already constitute 43% of the portfolio, aligning with the administration’s move towards more outcome-based procurement, and potentially improving net margins.
  
• Share repurchase activities exceeding commitments, with $850 million worth of shares repurchased in 2024, are expected to support EPS growth while leveraging the company’s strong balance sheet.

Leidos Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Leidos Holdings's revenue will grow by 3.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.5% today to 8.0% in 3 years time.
• Analysts expect earnings to reach $1.5 billion (and earnings per share of $11.89) by about March 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 16.9x on those 2028 earnings, up from 14.5x today. This future PE is lower than the current PE for the US Professional Services industry at 21.7x.
• Analysts expect the number of shares outstanding to decline by 2.99% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.11%, as per the Simply Wall St company report.

Leidos Holdings Future Earnings Per Share Growth

Risks

• The introduction of new competitors in regions served by Leidos could lead to increased pricing pressure, potentially impacting future revenues and net margins.
  
• Political and budgetary uncertainty, including potential pauses in federal spending, could disrupt order flow and revenue growth, affecting overall earnings.
  
• Increasing fixed-price versus cost-plus contracts could pressure margins if costs are underestimated, impacting net margins.
  
• Potential refinancing of debt in a high-interest-rate environment may increase interest expenses, which could negatively affect net earnings.
  
• Shifts in focus away from low-margin work may result in transitional revenue declines until higher-margin contracts fully ramp up, impacting short-term revenue and earnings.

Valuation

• The analysts have a consensus price target of $171.875 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 $220.0, and the most bearish reporting a price target of just $144.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $18.5 billion, earnings will come to $1.5 billion, and it would be trading on a PE ratio of 16.9x, assuming you use a discount rate of 7.1%.
• Given the current share price of $138.66, the analyst price target of $171.87 is 19.3% higher.
• 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.