Investidea: Leidos, because that's the time

Инвестидея: Leidos, потому что такое время

Leidos HoldingsLDOS107.19 $BuyService in partnership with Tinkoff Investments. Quotes are updated every 15 minutes

Today we have a moderately speculative idea.: take shares of the American holding Leidos (NYSE: LDOS), in order to make money on the stability of his business.

Growth potential and validity: 16,5% behind 15 months excluding dividends; 9% per annum during 15 years including dividends. In all cases, the possibility of separating one of the company's divisions into a separate issuer is taken into account..

Why stocks can go up: because this issuer can attract both activists, and conservative investors.

How do we act: we take shares now by 107,19 $.

When creating the material, sources were used, inaccessible to users from the Russian Federation. We hope, Do you know, what to do.

No guarantees

Our reflections are based on the analysis of the company's business and the personal experience of our investors, but remember: not a fact, that the investment idea will work like this, as we expect. Everything, what we write, are forecasts and hypotheses, not a call to action. To rely on our reflections or not – it's up to you.

And what is there with the author's forecasts

Research, like this and this, talk about, that the accuracy of target price predictions is low. And that's ok: there are always too many surprises on the stock exchange and accurate forecasts are rarely realized. If the situation were reversed, then funds based on computer algorithms would show results better than people, but alas, they work worse.

So we're not trying to build complex models.. The profitability forecast in the article is the author's expectations. We specify this forecast for the landmark. As with the investment idea in general, readers decide for themselves, it is worth trusting the author and focusing on the forecast or not.

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Investment editorial office

What the company makes money on

A very detailed analysis of the business of this company has already been published on the site., so we won't repeat ourselves here.. We will indicate the main points:

  1. The holding is divided into a civil part, which includes services for non-military departments and health care, and defense, which consists of army service and intelligence. The contribution of both parts to the company's revenue is approximately the same.
  2. 87% The company's revenue comes from the US government., whether in the form of a main contractor or subcontractor.
  Mark Douglas - Reason over the Market (interview)

Инвестидея: Leidos, потому что такое время

Инвестидея: Leidos, потому что такое время

Arguments in favor of the company

Sum of all parts. I believe, that the company's business is well balanced: the military and civilian services of the US government give its business sustainability, and the medical business is actively growing due to the spending of large medical companies on R&D.

In my opinion, it can attract investors to the shares, who will look for a combination of stability and prospects in our turbulent times.

Defense. The company's military business will be in great demand in the future as, how other countries will try to challenge American hegemony, and the American government will try to respond to this by increasing military spending.

Time to step up. The company's financial performance is significantly higher than the level of February 2020, but now Leidos shares are worth almost the same, how much and then. As a matter of fact, quotes are treading water, despite the fact that the company's business shows good results.

In my opinion, such a situation encourages the emergence of an investor-activist, who will begin to demand action from the company's management, which will lead to an increase in prices. For example, increase in dividends.

The company is now paying 1,44 $ per share per year - total 27,37% from her profit. Leidos dividend yield fluctuates around 1,3% per annum. Considering all of the above, the company may well double its dividend, and even more.

Inexpensive. The company is now inexpensive as in absolute terms., as well as in relative terms: capitalization 14.61 billion, P / S 1,11 and P / E 20,56.

Can buy. Considering all of the above, the company may well be bought. By the way,, an activist investor can push her to this.

Time to share. The company's medical business looks its best: revenue of Leidos government part grew in 2021 by about 6%, and medical - on 30%. At the same time, the operating margin as a percentage of the revenue of the government segment of the company is somewhere on the level 7,5%, and in medical this indicator is 17,3%.

It seems to me, the medical part of the business may well be spun off into a separate issuer - and the shares of this company may grow faster, than a single Leidos.

This option seems to me extremely likely in the event of an attack by an activist investor on these shares.. But even without activists, the likelihood of its implementation is very high.: commercial medicine and servicing government departments is, in fact, two different businesses, the company's operations will not be greatly affected by the separation. It is 3M not split without damage to all parts, but Leidos can be turned into two different companies.

  All about everything

What can get in the way

Accounting. The company has 8.917 billion dollars of debt, of which 3.229 billion must be repaid within a year. Not much money at the disposal of the company: 727 million on accounts and 2.189 billion debts of counterparties, so there is a possibility that, that the debt burden will continue to increase.

Considering, that rates are rising and loans are becoming more expensive, it's bad as for leidos accounting, same for quotes: investors can shun. Also, such a large amount of debt can limit the potential for dividend increases..

Political risks. Considering domestic political trends in the US like BLM and cancellation culture, there is always a chance, that in the USA they will arrange or a large-scale audit of spending on law enforcement agencies, or just cut them all at once. In this case, the shares and business of the company will suffer greatly..

What's the bottom line?

Shares can be taken now by 107,19 $. And then there are two options:

  1. keep shares up to the level 125 $. I think, that, taking into account all the positive aspects, we will achieve it in the next 15 Months;
  2. hold shares 15 years in sorrow and joy.

Here's what to keep in mind:

  1. In both cases, we take into account the likelihood of spin-off of the company's medical division into a separate issuer. It may turn out like this, that the shares of the main Leidos will fall, and the shares of a separate medical company will grow strongly. How it works, you can see in the comments to the idea on Synnex.
  2. The dividend yield of the company's shares is not very high, so, in my opinion, it makes no sense to fuss and monitor news about payments. Even if they are reduced or completely canceled, do not think, that stocks will fall sharply. Although I may be wrong here..

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