Financial strength dividend our financial strength

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FINANCIAL STRENGTH & DIVIDEND Our financial strength ranking on LDOS is Medium, the midpoint on our five-point scale. In our view, the company receives average scores on our financial strength criteria of debt levels, fixed-cost coverage, cash flow generation and profitability. Moody’s rates LDOS’s credit as Ba1/stable and Standard & Poor’s rates it as BBB-/stable. LDOS had $390 million in cash and cash equivalents and $3.1 billion in notes payable and long-term debt at the end of 2017. The debt/cap ratio at the end of the quarter was 47%, above the five-year average of 45.0%. The company is paying down debt accrued from the Lockheed merger. The company pays a quarterly dividend of $0.32 per share, or $1.28 annually, for a yield of about 2.1%. Management has said that it would continue to prioritize the use of excess cash to maintain the regular dividend. Our dividend forecasts are $1.28 for both 2018 and 2019. MANAGEMENT & RISKS Roger Krone has been the chairman and CEO of Leidos since July 2014. Prior to Leidos, he held senior management and finance positions at Boeing, McDonnell Douglas, and General Dynamics. James Reagan has been EVP and CFO since July 2015, and principal accounting officer since January 2016. From 2012 to 2015, Mr. Reagan served as SVP and CFO at Vencore, Inc., a provider of information solutions and engineering and analytic services to the U.S. Department of Defense and other government agencies. The company has set financial goals for 2018 and beyond, including: — 3% revenue growth — 10%+ adjusted EBITDA margin — 100%+ cash efficiency LDOS investors face risks related to the August 2016 transaction with Lockheed Martin. They also face risks related to increased industry competition, the company’s reliance on government spending, and high levels of goodwill and other intangible assets. COMPANY DESCRIPTION Leidos Holdings is a provider of technology and engineering services to defense, intelligence, homeland security, and healthcare customers. The company expanded significantly through its August 2016 merger with the Information Systems & Global Solutions unit of Lockheed Martin. Following the transaction, Lockheed Martin shareholders had a 50.5% stake in Leidos. VALUATION We think that LDOS shares are attractively valued at recent prices near $63. Over the past 52 weeks, the shares have traded in a range of $50-$70. From a technical perspective, the shares had been in a bullish pattern of higher highs and higher lows that dated to August 2016. However, since March 2018, the trend has turned bearish. We see potential near-term resistance at $66. On the fundamentals, the stock is trading at 14-times our 2018 EPS forecast, well below the average of 20.0 for other defense companies, and at the midpoint of the five-year historical range of 10-18. The stock trades at a price/sales ratio of 1.0, compared to a peer average of 2.8. Our dividend discount model renders a fair value near $100 per share. Blending our approaches, we arrive at a target price of $74.
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