The stock of Leidos Holdings (NYSE:LDOS, 30-year Financials) gives every indication of being fairly valued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $101.39 per share and the market cap of $14.3 billion, Leidos Holdings stock is believed to be fairly valued. GF Value for Leidos Holdings is shown in the chart below.
Because Leidos Holdings is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth, which averaged 8.9% over the past three years and is estimated to grow 6.89% annually over the next three to five years.
It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. Leidos Holdings has a cash-to-debt ratio of 0.07, which is in the bottom 10% of the companies in Software industry. The overall financial strength of Leidos Holdings is 4 out of 10, which indicates that the financial strength of Leidos Holdings is poor. This is the debt and cash of Leidos Holdings over the past years:
It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. Leidos Holdings has been profitable 9 over the past 10 years. Over the past twelve months, the company had a revenue of $12.7 billion and earnings of $4.98 a share. Its operating margin is 8.39%, which ranks in the middle range of the companies in Software industry. Overall, the profitability of Leidos Holdings is ranked 7 out of 10, which indicates fair profitability. This is the revenue and net income of Leidos Holdings over the past years:
Growth is probably one of the most important factors in the valuation of a company. GuruFocus’ research has found that growth is closely correlated with the long-term performance of a company’s stock. If a company’s business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. Leidos Holdings’s 3-year average revenue growth rate is in the middle range of the companies in Software industry. Leidos Holdings’s 3-year average EBITDA growth rate is 14.9%, which ranks in the middle range of the companies in Software industry.
Another way to evaluate a company’s profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). 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. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Leidos Holdings’s ROIC was 8.60, while its WACC came in at 5.90. The historical ROIC vs WACC comparison of Leidos Holdings is shown below:
In summary, The stock of Leidos Holdings (NYSE:LDOS, 30-year Financials) gives every indication of being fairly valued. The company's financial condition is poor and its profitability is fair. Its growth ranks in the middle range of the companies in Software industry. To learn more about Leidos Holdings stock, you can check out its 30-year Financials here.
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