"Lido, Whoah oh oh oh
He's for the money
He's for the show
Lido's waitin' for the go"
- Lyrics from Boz Scagg's Lido Shuffle
Boz Scagg's song, Lido Shuffle, was about a drifter looking for a big score. As investors, we are similar to a drifter looking for a big score as we seek out great investments that will pay off. Most of us have conservative methods of investing such as dollar cost averaging in retirement plans to carefully reach our financial goals. However, many of us also seek out great investments outside of retirement plans with a goal of outperforming the S&P 500.
Leidos (NYSE:LDOS) is a company that I think will be a big score for investors via a great combination of conservative investing (dividends) with price appreciation (driven by growth). Leidos has solutions in the following major markets: intelligence, defense, civil, health, and homeland security. Each of these key markets demands effective solutions and Leidos aims to fulfill those demands.
Image source: glasbergen.com
The stock yields 3% with a 36% payout ratio. With a low payout ratio, the company has the ability to raise the dividend payments as earnings continue to grow without adding to debt. Since revenue and EBITDA are expected to grow at strong double-digit rates in 2017 (consensus), Leidos is positioned well to increase the dividend and to benefit from stock price appreciation.
Segment Analysis
All of Leidos' business segments provide important solutions that solve challenging problems in today's world. The constant threat of terrorism is fought with Leidos' intelligence, defense, and homeland security solutions as part of the National Security Solutions segment. The challenge of managing health data and improving the environment/infrastructure is covered through Leidos' Health and Infrastructure segment.
The National Security segment comprises about 70% of Leidos' total revenue and 81% of total operating income. This segment is likely to thrive for Leidos as the company provides intelligence agencies and other customers with large scale intelligence systems, data analytics, cybersecurity solutions, etc.
Leidos is an expert provider of sensor solutions for radar technology, electronic warfare, radiation/radiography, ground sensing, and other surveillance systems. These solutions are likely to remain in demand to fight terrorism and to enhance safety/security as these are ongoing serious concerns for the well-being of humanity.
Leidos recently was awarded with a $777 million contract from the General Services Administration to support the Army Geospatial Center's High Resolution, 3-D [HR3D] Geospatial Information program. Leidos will gather, process, and store HR3D information. The company will perform aerial and terrestrial collection operations and use advanced Light Detection and Ranging [LIDAR] sensing technology from high altitudes.
The $777 million contract represents 7.8% of Leidos' revenue of $10 billion from last fiscal year which ended January 1, 2016. This contract demonstrates that Leidos is a go-to company for complex strategic systems. The company's systems expertise and the constant threat of terrorism make it likely that Leidos will continue to be awarded with lucrative contracts in the National Security segment going forward.
The Health and Infrastructure segment comprises 30% of the company's revenue. On the health side, Leidos provides solutions to improve collections, reduce receivables, help customers meet regulatory requirements, optimizes technology for clinical workflows, and for the safekeeping of data.
The infrastructure portion of the segment offers solutions for integrating and protecting physical, digital, and data domains. Leidos' solutions allow customers to maximize performance with equipment and effective data that helps improve efficiencies. One example includes helping airport operators improve efficiency for better passenger experiences through better equipment and data management. This means that baggage inspections are faster and more accurate. It also means that reactions are improved for responses to emergency situations.
Leidos also helps airports to reduce their dependence on physical equipment (removal of peripheral Ethernet ports), thus freeing up space for more food and retail businesses. The system consumes 50% less energy than traditional networks, providing operators with significant cost savings. As companies realize they can increase safety and security while decreasing costs, Leidos is likely to experience increased revenue for the foreseeable future.
Attractive Valuation
Leidos is trading at 16X expected 2017 EPS of $2.69. The company's competitors with similar market caps in the Information and Delivery Services industry, Factset Research (FDS) and Broadridge Financial Solutions (BR) are trading with higher valuations with forward PE ratios of 26 and 24 respectively. I realize that FDS and BR don't offer the same services as Leidos, but they are categorized in the same industry.
Leidos still looks attractive when comparing it to the larger companies that operate similar services. Raytheon (RTN) and Northrop Grumman (NOC) are trading at 18X and 19X expected 2017 EPS respectively. Leidos looks more reasonably valued, while the others have premium valuations.
I see Leidos as a reasonably priced dividend stock. Many dividend stocks are trading with premium valuations as investors seek yield in a low yield environment. Leidos is a bargain as it trades about 11% below the S&P 500's forward PE of 18.
Risks to Investment
Leidos derives 76% of total revenue from the U.S. government. Therefore, if the government decides to cut spending for defense/security purposes, the company could lose significant revenue. However, with the threat of terrorism and cyber-attacks constantly on the table, Leidos is likely to get a steady amount of lucrative contracts going forward.
Conclusion
With an attractive valuation providing a good entry point for the stock and strong revenue growth expected for 2017, I think that Leidos has the potential to outperform at least through 2017. The company provides solutions that are being demanded for the various current threats that we face online and offline.
I think the stock will rise about 18% by the end of 2017. This is based on the PE expanding to match the S&P 500's PE of 18 plus earnings growth of 6% to 7%. This gives the stock a price target of about $50. Add in the 3% dividend and investors will be getting a big score which I will call the Leidos Shuffle.
David Zanoni
David focuses on growth & momentum stocks that are reasonably priced and likely to outperform the market over the long-term. He is a long term investor of quality stocks and uses options for strategy. David told investors to buy in March 2009 at the bottom of the financial crisis. The S&P 500 increased 367% and the Nasdaq increased 685% from 2009 through 2019. He wants to help make people money by investing in high-quality growth stocks.
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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