Leidos Holdings: Strong Growth, Solid Share Buybacks, Insider Buying Activity (NYSE:LDOS)

Leidos Holdings, Inc. (NYSE:LDOS) has demonstrated strong financial performance in recent quarters, with its share price up nearly 40% since February.

In this article, I will review their recent financial results, including some of the international headwinds segment, including a $39 million value reduction in the UK market.

I’ll look at recent insider buying activity and their share buyback program, as well as updated guidance for the full year.

In the insights section, I will provide all the details that led to my buy rating. For now, I’ll start with a company overview section for those new to this stock.

Company overview

Leidos is a US-based company that provides technology solutions and services to the defense, civil and healthcare markets.

About 87% of its revenue in 2023 came from US government agencies, including the US Department of Defense, the US Intelligence Community, Federal Aviation Administration, and NASA.

They operate through three business segments:

• Defense: This segment includes digital modernization services, command and control systems, intelligence, surveillance, reconnaissance technologies, mission operations and space solutions. This is their main segment, accounting for 56% of total revenue in 2023.
• Civil: This segment is focused on modernizing infrastructure, systems and security for civil and commercial government customers.
• Healthcare: This segment includes solutions for federal healthcare customers, providing healthcare information management services, life sciences research and development, managed health services and healthcare digital transformation.

I thought I’d include a summary of revenue by business segment from their latest annual report below.

Click to enlarge

An author’s compilation of the most recent 10-K.

The majority of their revenue comes from the US, although 9% of their total annual revenue in 2023 came from international clients (a mix of government and commercial clients), mainly from the UK and Australia.

In terms of company ownership, their most recent 14A filing shows that all 26 directors and executive officers collectively own 0.96% of the common stock. As you may know, my investment style favors companies where management has significant skin in the game. In my view, 0.96% ownership is a small stake in the company.

That said, I’m glad I don’t see any large private equity firms as 5% owners, which gives management more control in running the company.

Recent performance

Let’s start with headwinds.

Leidos has taken a $39m cut in its UK business due to problems with two contracts. These contracts experienced delays due to changing customer requirements and schedule slippages, resulting in an international segment operating margin of -2%.

To put things into context, in the same quarter last year, the international segment had a positive operating margin of 6.2%.

Excluding the value decline in the UK business, the overall segment would have shown an operating income margin of 8%. So if management resolves execution risks in the UK, margins in the international segment could improve from last year.

The other pressure comes from uncertainties surrounding the Veterans Benefits Administration (VBA) contract.

VBA faces funding challenges related to caseloads driven by the PACT Act, which expanded benefits for veterans. In response to budget pressures, the VBA cut staff, leading to lower caseloads for contractors like Leidos.

In addition, the VBA contract, which is a major contributor to the growth of the Health & Civil segments, is approaching a competency phase. Management expects the re-bidding process to take place in late 2024, although no formal RFP has yet been issued. This makes me sweat because the outcome of this recalculation could have a significant impact on Leidos’ future revenue in this segment.

Despite these headwinds, second-quarter results were mostly favorable, beating both EPS and revenue estimates.

Revenue rose 8% year over year to $4.1 billion. The key segment behind this growth was the Health and Civil segment, with revenue growth of 22% over last year.

Their other two segments posted mid to low single digit growth.

In terms of their profitability, the Health & Civil segment saw a major increase in operating margins from 13.0% to 24.3%.

In response to a good quarter, management raised full-year 2024 guidance. Specifically, they raised the bottom line of revenue guidance by $100 million and diluted non-GAAP guidance for EPS to a range of 8, $60 to $9.00, from the previous range of $8.40 to $8.80.

Outlook

Let’s start with price action. The weekly chart below shows a bull run since February 2024, with the stock price rising nearly 40% since breaking the $110 resistance level.

The RSI is showing signs of overbought activity, which raises concerns given the steep rise in the share price in such a short time frame.

This sharp increase makes sense based on the financials, given that the company beat both EPS and revenue estimates, as shown below.

Additionally, both EBITDA and operating income have grown steadily since Q1 2023.

In terms of the cash flow situation, they have had positive free cash flow since Q2 2023, which I see as a very healthy sign.

In terms of their debt, both their quick and current ratios are above 1 and their debt to assets ratio is 0.4, which indicates to me that they are well positioned to repay both their short term liabilities and in the long term.

As for the share buyback program, management has committed to buy back $500 million in shares by the end of the year, half of which has already been completed by the second quarter. This was accompanied by $248,305 worth of insider buying activity by CEO Bell Thomas Arthur on August 1st.

In my view, management is bullish on the current share price despite the overbought indication in the RSI.

This, along with good financial results in recent quarters, motivates my Buy rating for this stock. However, I must mention that I have not yet bought shares in the company, as I believe there is a risk in the re-competition phase of the VBA program. If this risk materializes, I think the share price could drop significantly. So, I recommend taking a closer look at the state of the VBA recalculation phase in the next earnings releases.

Conclusion

In conclusion, I believe Leidos has shown strong financial performance in recent quarters, particularly in its healthcare and civil segments. However, there is some uncertainty around the re-competition of the VBA contract and challenges with their UK contracts.

However, despite these concerns, the CEO’s insider buying activity, elevated full-year guidance, and $500 million share repurchase program lead me to believe that management has confidence in the company’s current price. shares, despite the overbought indication in the RSI.

Therefore, I maintain a buy rating on this stock and recommend closely monitoring the VBA rematch as it could have a significant impact on the share price.