The stock of Leidos Holdings Inc (LDOS, Financial) has seen a daily gain of 8.37% and a 3-month loss of -1.72%, with an Earnings Per Share (EPS) of 5.12. The question arises: Is the stock modestly undervalued? This article aims to provide a comprehensive valuation analysis of Leidos Holdings (LDOS), which will help investors make informed decisions. Let's dive into the details.
Company Overview
Leidos Holdings Inc is a prominent technology, engineering, and science company. It offers services and solutions in the defense, intelligence, civil, and health markets, both domestically and internationally. The company's customers include the U.S. Department of Defense, the U.S. Intelligence Community, the Department of Veterans Affairs, and many other U.S. civilian, state, and local government agencies. The company operates in three reportable segments: Defense Solutions, Civil, and Health, with Defense Solutions being the key revenue generator.
The stock is currently priced at $99.47, while the GF Value, an estimate of fair value, stands at $113.55. This suggests that the stock might be modestly undervalued. Here's a breakdown of the company's income:
GF Value: A Reliable Valuation Method
The GF Value represents the current intrinsic value of a stock derived from GuruFocus's proprietary method. It is calculated based on historical multiples, GuruFocus adjustment factor based on the company's past returns and growth, and future estimates of the business performance. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at.
Based on this method, Leidos Holdings (LDOS, Financial) appears to be modestly undervalued. If the stock price is significantly above the GF Value Line, the stock may be overvalued and have poor future returns. Conversely, if the share price is significantly below the GF Value Line, the stock may be undervalued and have higher future returns.
As Leidos Holdings is relatively undervalued, the long-term return of its stock is likely to be higher than its business growth.
Link: These companies may deliver higher future returns at reduced risk.
Financial Strength
Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid this, an investor must review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to understand its financial strength. Leidos Holdings has a cash-to-debt ratio of 0.06, which ranks worse than 94.41% of 2739 companies in the Software industry. The overall financial strength of Leidos Holdings is 5 out of 10, which indicates that the financial strength of Leidos Holdings is fair.
This is the debt and cash of Leidos Holdings over the past years:
Profitability and Growth
Investing in profitable companies, especially those with consistent profitability over the long term, is less risky. A company with high profit margins is usually a safer investment than those with low profit margins. Leidos Holdings has been profitable 9 out of the past 10 years. Over the past twelve months, the company had a revenue of $14.80 billion and an Earnings Per Share (EPS) of $5.12. Its operating margin is 7.88%, which ranks better than 64.48% of 2765 companies in the Software industry. Overall, the profitability of Leidos Holdings is ranked 8 out of 10, which indicates strong profitability.
Growth is probably the most important factor in the valuation of a company. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Leidos Holdings is 10.9%, which ranks better than 56.61% of 2397 companies in the Software industry. The 3-year average EBITDA growth rate is 6.1%, which ranks worse than 56.4% of 1991 companies in the Software industry.
ROIC vs WACC
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Leidos Holdings's return on invested capital is 8.68, and its cost of capital is 7.78.
The historical ROIC vs WACC comparison of Leidos Holdings is shown below: 
Conclusion
Overall, Leidos Holdings (LDOS, Financial) stock is estimated to be modestly undervalued. The company's financial condition is fair and its profitability is strong. Its growth ranks worse than 56.4% of 1991 companies in the Software industry. To learn more about Leidos Holdings stock, you can check out its 30-Year Financials here.
To find out the high quality companies that may deliver above average returns, please check out GuruFocus High Quality Low Capex Screener.
This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
