Shareholders of Leidos would probably like to forget the past six months even happened. The stock dropped 44.1% and now trades at $106.92. This may have investors wondering how to approach the situation.
Following the pullback, is now an opportune time to buy LDOS? Find out in our full research report, it’s free.
Why Does Leidos Spark Debate?
Formed through the split of IT services company SAIC, Leidos (NYSE: LDOS) offers technology and engineering solutions such as military training systems for the defense, civil, and health markets.
Two Positive Attributes:
1. Surging Backlog Locks In Future Sales
Investors interested in Defense Contractors companies should track backlog in addition to reported revenue. This metric shows the value of outstanding orders that have not yet been executed or delivered, giving visibility into Leidos’s future revenue streams.
Leidos’s backlog punched in at $48.37 billion in the latest quarter, and over the last two years, its year-on-year growth averaged 17.6%. This performance was fantastic and shows the company has a robust sales pipeline because it is accumulating more orders than it can fulfill. Its growth also suggests that customers are committing to Leidos for the long term, enhancing the business’s predictability. 
2. Increasing Free Cash Flow Margin Juices Financials
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
As you can see below, Leidos’s margin expanded by 5.1 percentage points over the last five years. This is encouraging, and we can see it became a less capital-intensive business because its free cash flow profitability rose more than its operating profitability. Leidos’s free cash flow margin for the trailing 12 months was 10.7%.
One Reason to Be Careful:
Long-Term Revenue Growth Disappoints
Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last five years, Leidos grew its sales at a mediocre 6.4% compounded annual growth rate. This wasn’t a great result compared to the rest of the industrials sector, but there are still things to like about Leidos.
Final Judgment
Leidos’s positive characteristics outweigh the negatives. After the recent drawdown, the stock trades at 8.5× forward P/E (or $106.92 per share). Is now the time to initiate a position? See for yourself in our comprehensive research report, it’s free.
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