Argus Takes A Positive View On Leidos Holdings-Lockheed Unit Merger

Argus initiated coverage of Leidos Holdings, Inc. LDOS with a Buy rating and $54 price target, implying a potential upside of 30 percent from the recent close.

Leidos recent merger with Lockheed Martin Corporation LMT's Information Systems & Global Solutions unit should reduce the combined company's dependence on government contracts. Leidos expects the merger to generate more than $50 million in cost synergies by the end of 2017 and $120 million by late 2018.

"The acquired Lockheed business has a larger proportion of nonmilitary and commercial customers than Leidos, and should also provide significant revenue and cost synergies," analyst Stephen Biggar wrote in a note.

Biggar set a 2016 estimate for adjusted EPS from continuing operations of $3.05, up 5.5 percent from the $2.89 posted in 2015, on a 2 percent increase in total revenue. In 2017, the analyst sees EPS to increase by an additional 4.9 percent to $3.20, on a further 2 percent increase in revenue.

On the valuation front, LDOS is trading at just 12.9-times Argus' 2017 EPS forecast, well below the average of 20.5 for peer IT services companies.

"Although we expect slower growth at Leidos than at peers in the near term, we believe that the nearly 40% valuation discount is excessive given the company's improving outlook," Biggar noted.

At time of writing, shares of Leidos were up 0.87 percent to $41.91.