Truist Securities has increased its price target on shares of Leidos Holdings (NYSE: NYSE:LDOS) to $175.00 from $165.00 while reaffirming its Buy rating.
The firm's analysts highlighted Leidos' attractive valuation and the potential to unlock value from its existing portfolio as key factors for the revised target.
Leidos Holdings, a defense contractor and information technology company, is seen as undervalued by Truist Securities compared to its peers, with a 16% discount on enterprise value to earnings before interest, taxes, depreciation, and amortization (EV/EBITDA) for the calendar year 2024 estimates.
The firm also sees an opportunity for Leidos to expand its profit margins through new management's cost optimization strategies.
The analysts noted that Leidos' guidance for 2024 suggests a slowdown in organic growth from 8% in the first half to 3% in the second half, with consensus estimates modeling only 4% growth for 2025.
Additionally, consensus estimates predict a slight decrease in EBITDA margin to 11.6% in 2025 from approximately 12% in 2024. Despite these forecasts, Truist Securities believes there could be offsetting factors, such as the maturation of ramping contracts and improvements in other segments, like Civil and Commercial/International.
Truist Securities also pointed out that Leidos has the potential for substantial capital returns and may consider divesting its SES and Dynetics businesses. According to the firm's estimates, these divestitures could fetch multiples of 9x-11x EV/EBITDA for SES and 14x-17x for Dynetics, potentially yielding around $3 billion in pre-tax proceeds.
The analysts think that such strategic moves would allow Leidos to focus on its core Mission IT services and reduce the volatility from airport capital expenditures and product delivery timings.
In other recent news, Leidos Holdings secured several significant contracts, demonstrating robust financial performance. The company has been awarded a $51 million contract by the Centers for Disease Control and Prevention (CDC) for the modernization of the National Healthcare Safety Network (LON:NETW).
Additionally, Leidos has been tasked by the Space Systems Command to enhance missile warning and tracking capabilities. Other recent contracts include a $326.5 million contract by the National Institutes of Health to support the eRA system, an $86.4 million contract from the National Geospatial-Intelligence Agency for lifecycle management of analytics systems, and a $191 million contract to provide the U.S. Army with integrated lifecycle software and management solutions.
The company has also reported a 7.7% year-over-year increase in revenue, reaching $4.13 billion, and a significant rise in adjusted EBITDA, hitting $559 million, a 33% increase from the previous year.
Based on these results, Leidos has raised its full-year guidance, projecting revenues for 2024 to be in the range of $16.1 billion to $16.4 billion, with adjusted EBITDA expected to be around 12%.
InvestingPro Insights
As Leidos Holdings (NYSE:LDOS) garners attention from Truist Securities, real-time data from InvestingPro provides additional context to the company's financial health and market performance. With a market cap of $21.03 billion and a revenue growth of 7.86% over the last twelve months as of Q2 2024, Leidos demonstrates a solid financial trajectory. Despite the high P/E ratio of 48.39, which suggests a premium valuation, the company's commitment to shareholder returns is evidenced by a consistent dividend growth, having raised its dividend for 5 consecutive years.
InvestingPro Tips indicate that Leidos is expected to experience net income growth this year, reinforcing the positive outlook shared by Truist Securities. Additionally, the company's stock is known for low price volatility, which may appeal to investors seeking stability. For those interested in further analysis, InvestingPro offers 13 additional tips on Leidos, which can be explored for a deeper understanding of the company's market position and future prospects.
With the stock trading near its 52-week high at 98.11% of the peak and a year-to-date price total return of an impressive 45.02%, Leidos appears positioned to capitalize on its industry standing as a prominent player in the Professional Services sector. These insights offer investors a comprehensive view of Leidos' value proposition in the current market.
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