Leidos Holdings, Inc. (LDOS)

(9 October 2016)

LDOS Fundamentals

• Price to Earnings: 17.72
• Earnings Per Share: $3.91
• Market Cap: 6.5B
• Current Ratio: 1.84
• Return on Equity: 25.96%
• Dividend Yield: 2.28%
• Debt to Capital: 50.4%

Income Statement ($ in Millions)

• Revenues for 6 Months Ended increased $97
• Operating Income increased $62

Cash Flow Statement ($ in Millions)

• Total Cash Flow Provided by Operating Activity decreased $51
• Cash and Cash Equivalents at end of period increased $305
• Cash Provided by Investment Activities increased $34.

Balance Sheet ($ in Millions)

• Current Assets increased by $31
• Total Current Liabilities decreased by $50
• Total Stockholder’s Equity increased $56

Highlights from 10-Q

• January 26, 2016 LDOS entered into definitive agreement with Lockheed Martin whereby Information Systems & Global Solutions Business will be merged with a wholly-owned subsidiary of Leidos.
  • “On January 26, 2016, Leidos announced that it had entered into a definitive agreement (as amended, the “Merger Agreement”), dated January 26, 2016, with Lockheed Martin Corporation (“Lockheed Martin”); Abacus Innovations Corporation, a Delaware corporation and a wholly owned subsidiary of Lockheed Martin (“Splitco”); and Lion Merger Co., a Delaware corporation and a wholly owned subsidiary of Leidos (“Merger Sub”), pursuant to which Leidos will combine with Lockheed Martin’s realigned Information Systems & Global Solutions business (“IS&GS”) (collectively, the “ISGS Business”) in a Reverse Morris Trust transaction. In connection with the Merger Agreement, Lockheed Martin and Splitco entered into a Separation Agreement dated January 26, 2016 (the “Separation Agreement”), pursuant to which Lockheed Martin will separate the ISGS Business from Lockheed Martin and transfer the ISGS Business to Splitco. The transactions contemplated by the Merger Agreement and the Separation Agreement are referred to herein as the “Transactions.”

LDOS in The News

• October 6^th, 2016
  • Leidos Holdings, Inc. Upgraded to Buy at Zacks Investment Research
  • Lockheed Unit wins $215M Deal for CASS Support Services
• September 28^th, 2016
  • Leidos Announces $14M Contract for Cyber Defense
  • Leidos Wins IARPA R&D Contract to Anticipate Cyberattacks Using Novel Sensors.

Why You Should Buy LDOS

LDOS is a great value buy at these levels for many reasons. First and foremost, LDOS sports a solid balance sheet, heavy in cash, and heavy in great assets. Secondly, LDOS is a profitable company, being able to sustain dividend payment of $0.64 per share. Also, LDOS is trading at a handsomely cheap 17 times earnings, which is well below the 20 times earnings from its fellow IT competitors.

However, the biggest reason to be a buyer of LDOS is its recent acquisition of Lockheed Martin’s ISGS business, which has already won awards and contract deals for cyber security. This is crucial in two senses. First, it signals that LDOS is ahead of the curve on its competitors by seeing the future of cyber security, as well as the tremendous need for it within our defense system (rise of ISIS, global terrorism), cyber security is the new battleground going into the future. Secondly, LDOS made this deal knowing it would be a profitable deal for the company as a whole. Sometimes you’ll see companies absorb other wings of businesses with hopes of it being profitable. LDOS acquired a cash cow with Lockheed Martin’s ISGS business.

Finally, in terms of revenue, with the acquisition of Lockheed Martin’s ISGS business, LDOS has diversified its revenue streams more evenly among military, government, and commercial customers.

Why You Should Sell LDOS

Technical Analysis is the only reason I would not be a buyer right now with LDOS. If you look solely at the charts (knowing that this always isn’t the best thing to do as a value investor) for one year and three-year time periods, you see something that can be a bit dangerous; a double top. In most cases, double tops are followed by stiff selling, bringing the price action down to previous support levels.

In all transparency, I think LDOS is a tremendous company that should be bought, however, at this price? I think it’s still overvalued in terms of its recent run up. Granted, LDOS has seen a bit of a sell-off going into October, but over the last three months, its climbed from $34 to $42 per share. Is there room for a pull-back? It’s hard to say given the tremendous amount of good news following this company which could prove to be a real tangible catalyst for stock price growth. However, from a purely technical standpoint, right now would not be a good entry point for this company, I would like to buy it closer to the $40 or $38 range.