Citi Resumes Coverage Of Leidos At Buy, Lifts Price Target To $47

Citi resumed coverage of Leidos Holdings, Inc. LDOS with a Buy rating as EPS growth is expected to accelerate to high-single digits by 2018 on modest sales growth, margin expansion and de-levering.

The IS&GS deal provides Leidos sales and margin growth opportunities as it diversifies the portfolio while expanding the company's reach into various end-markets.

"[A]lthough LDOS spent its dry powder on Lockheed Martin Corporation, the stock's cheap & yields >3%, among the highest in all A&D. And hitting management's 2019 targets could eventually support a ~$55 stock," analyst Jonathan Raviv wrote in a note.

However, the analyst said it's still a low-growth market with Leidos aiming to take market share at a targeted 3 percent average annual organic growth in 2016-19 driven by the newly combined capabilities as well as new investments yielding sales synergies.

"Sales synergies are tough to count on, but it's fair to think that the combined company can win more against a larger identified pipeline of opportunities which would not have been accessible for each company as a standalone," Raviv highlighted.

As such, the analyst acknowledged the challenges ahead and linearity to LDOS' 2019 targets (about $11 billion sales & greater than 10 percent adj. EBITDA margin). The analyst doesn't see 3 percent organic growth until 2018 and is behind the company's 2019 target of about $11 billion sales.

"But, we still see mid/high-single digit EPS growth when low sales growth combined with margin expansion from the integration (from ~8.5% EBITDA this year toward peers at 9-10%) and de-levering," the analyst continued.

Moreover, Raviv noted that the company's maintenance of dividend sends a strong message and underlines their confidence in their targets.
Raviv also raised the price target to $47 from $44.17, with the revised target implying a potential return of 14.1 percent.

"Granted, it's a messy story for the next 12-18 months with lots of adjustments & Consensus needing to align. But we see upside deserving a Buy," Raviv added.