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Leidos (LDOS) Up 4.4% Since Last Earnings Report: Can It Continue?

Zacks Equity Research

It has been about a month since the last earnings report for Leidos (LDOS). Shares have added about 4.4% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Leidos due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Leidos Holdings' Q2 Earnings Beat, 2019 EPS View Up

Leidos Holdings second-quarter 2019 adjusted earnings of $1.16 per share surpassed the Zacks Consensus Estimate of $1.10 by 5.5%. The bottom line also increased 3.6% from $1.12 registered a year ago. This uptick can be attributed to solid revenues and operating income growth.

However, the company’s GAAP earnings of 93 cents per share slipped from the year-ago figure of 94 cents.

Total Revenues

Leidos Holdings generated total revenues of $2,728 million in the quarter under consideration, which exceeded the Zacks Consensus Estimate of $2,637 million by 3.5%. The top line also improved 7.9% year over year backed by growth across all its segments.

Backlog

At the end of the reported quarter, the company’s total backlog was $21.7 billion compared with $21.5 billion at the end of the first quarter. Of this total backlog, $6.3 billion was funded.

Operational Statistics

Total cost of revenues in the second quarter increased by 9.1% to $2,348 million. Operating income totaled $210 million compared with $199 million in the year-ago period. This upside was driven by decrease in integration and restructuring costs.

As a result, the operating margin contracted to 7.7% from 7.9% in the year-ago quarter.

Interest expenses summed $33 million compared with $35 million in the prior-year quarter.

Segmental Performance

Defense Solutions: Net revenues at this segment increased 6.7% to $1,346 million from the prior-year figure of $1,262 million. This improvement can be primarily attributed to new awards that the segment received in the quarter under review.

Also, the segment’s operating income rose 7.4% to $101 million from the year-ago income of $94 million, with the operating margin having expanded 10 basis points (bps) to 7.5%.

Health: The segment recorded revenues of $501 million in the second quarter, up 11.1% year over year. The uptick was primarily driven by a net increase in program volumes and new awards.

However, operating income declined 10.3% to $61 million, while operating margin contracted 290 bps to 12.2%.

Civil: Revenues at this segment amounted to $881 million, up 8% year over year. New awards and a net increase in program volumes lead to the upside.

While operating income rose 13.3% to $68 million, operating margin expanded 30 bps to 7.7%.

Financials

Cash and cash equivalents as of Jun 28, 2019, were $660 million compared with $327 million as of Dec 28, 2018. Net cash provided by operating activities at the end of second-quarter 2019 amounted to $186 million compared with $271 million a year ago.

2019 Guidance

Leidos Holdings has partially raised its outlook for 2019. The company currently expects its adjusted earnings to be in the $4.50-$4.75 range, up from $4.30-$4.65 anticipated earlier. The Zacks Consensus Estimates for 2019 earnings is pegged at $4.60, below the mid-point of the company’s projected view.

Moreover, the company expects 2019 revenues in the range of $10.65-$10.95 billion compared with the earlier band of $10.5-$10.9 billion. The Zacks Consensus Estimates for revenues stands at $10.73 billion, below the mid-point of the company guided range.

However, the company’s cash flow from operating activities is still anticipated to be around $825 million at 2019 end.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates revision.

VGM Scores

Currently, Leidos has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of this revision looks promising. Notably, Leidos has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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