Why Is Leidos (LDOS) Down 35.4% Since Last Earnings Report?

A month has gone by since the last earnings report for Leidos (LDOS). Shares have lost about 35.4% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Leidos due for a breakout? 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 catalysts.

Leidos Holdings Q4 Earnings Beat, Revenues Rise Y/Y

Leidos Holdings fourth-quarter 2019 adjusted earnings of $1.51 per share surpassed the Zacks Consensus Estimate of $1.35 by 11.9%. The bottom line also increased 37.3% from $1.10 a year ago.

Moreover, the company’s GAAP earnings of $1.26 per share increased from $1.25 in the year-ago quarter. This upside can be attributed to solid revenues and operating income.

For 2019, the company reported adjusted earnings of $5.17 per share that surpassed the Zacks Consensus Estimate of $5 by 3.4%. The bottom line increased 18% from $4.38 a year ago.

Total Revenues

Leidos Holdings generated total revenues of $2,954 million in the quarter, which exceeded the Zacks Consensus Estimate of $2,830 million by 4.4%. The top line also improved 11.6% year over year, backed by growth across all segments.

For 2019, the company generated total revenues of $11.09 billion, which exceeded the Zacks Consensus Estimate of $10.97 billion by 1.1%. The full-year top line also improved 8.8% from the prior year.

Backlog

At the end of 2019, the company’s total backlog was $24.1 billion compared with $20.8 billion as of Dec 28, 2018. Of this, $5.4 billion was funded.

Operational Statistics

Total cost of revenues in the fourth quarter increased 10.9% to $2,527 million. Operating income totaled $261 million, compared with $188 million in the year-ago period. The upside was driven by a decrease in selling, general and administrative expenses along with a decline in integration and restructuring costs.

As a result, operating margin expanded to 8.8% from 7.1% in the year-ago quarter.

At the end of 2019, the company’s total backlog was $24.1 billion compared with $20.8 billion as of Dec 28, 2018. Of this, $5.4 billion was funded.

Operational Statistics

Total cost of revenues in the fourth quarter increased 10.9% to $2,527 million. Operating income totaled $261 million, compared with $188 million in the year-ago period. The upside was driven by a decrease in selling, general and administrative expenses along with a decline in integration and restructuring costs.

As a result, operating margin expanded to 8.8% from 7.1% in the year-ago quarter.

Interest expenses were $34 million, which came in line with the prior-year quarter figure.

Segmental Performance

Defense Solutions: Net revenues at this segment increased 10.7% to $1,400 million from $1,265 million in the prior-year quarter. This improvement can be primarily attributed to new awards and a net increase in program volumes.

Also, the segment’s operating income improved 55% to $124 million from the year-ago quarter’s income of $80 million. Operating margin expanded 260 basis points (bps) to 8.9%.

Health: The segment recorded revenues of $526 million in the fourth quarter, up 5.8% year over year. The uptick was primarily driven by a net increase in program volumes, new awards and acquisition of IMX Medical Management Services.

Operating income increased 7.4% to $73 million, while operating margin expanded 40 bps to 13.9%.

Civil: Revenues at this segment amounted to $1,028 million, up 16.2% year over year. New awards and a net increase in program volumes led to the upside.

While operating income improved 54% to $97 million, operating margin contracted 230 bps to 9.4%.

Financials

Cash and cash equivalents as of Jan 3, 2020 were $668 million compared with $327 million as of Dec 28, 2018. Net cash provided by operating activities at the end of 2019 amounted to $992 million compared with $768 million a year ago.

Guidance

Leidos Holdings issued its guidance for 2020. The company currently expects adjusted earnings in the range of $5.30-$5.65. The Zacks Consensus Estimate for 2020 earnings is pegged at $5.45, below the mid-point of the company’s projected range.

Moreover, the company expects 2020 revenues of $12.6-$13.0 billion. The Zacks Consensus Estimate for revenues stands at $11.68 billion, lower than the company’s guided range.

Management expects adjusted EBITDA margin of 10-10.2%, while cash flow from operating activities is expected to be or above $1billion.

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, though it is lagging a bit on the Momentum Score front with a C. Following the exact same course, 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 B. 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. It comes with little surprise Leidos has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.