Leidos Could See 50% Upside, Goldman Adds To Conviction List

Leidos Holdings, Inc. LDOS, a U.S.-based defense company formed as part of a 2016 spin-off, is among the least expensive defense stock, according to Goldman Sachs.

The Analyst

Goldman Sachs' Noah Poponak maintains a Buy rating on Leidos Holdings' stock with a price target boosted from $91 to $100. The stock was also added to Goldman Sachs' "Conviction List."

The Thesis

Leidos is the least expensive defense stock among Goldman Sachs' coverage "by far on all key metrics," Poponak said in a note. The company is expected to grow its free cash flow per share by 40 percent in 2018, 30 percent in 2019 and then 15 percent in 2020. This would give the company the highest free cash flow yield in the firm's defense coverage even when factoring negative impacts the company faces from the IS&GS cash restructuring and from working capital build and an elevated capex.

Leidos is trading near its all-time lows compared to the market and notable industry peers. Poponak said this is unjustified based on the company is scaling up through the IS&GS acquisition and solidified itself as a "the largest player in the space" and expectations for improvements in financial returns.

The company boasts more exposure to the U.S. Department of Defense compared to the average government IT company where investment authority is growing at a 9 percent compounded annual growth rate, the analyst said. As such, it's well positioned to capitalize on multiple growth initiatives and return cash to investors in a shareholder-friendly manner.

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