Leidos Holdings Inc.’s LDOS shares have surged an impressive 6.9% over the past month, outperforming the Zacks Aerospace-Defense industry’s gain of 2% as well as the broader Zacks Aerospace sector’s return of 2.1%. The defense contractor has also outpaced the S&P 500’s return of 0.4% in the past month. 

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A similar stellar performance has been offered by other defense players, such as RTX Corp. RTX, Textron Inc. TXT and Northrop Grumman Corp. NOC, whose shares have witnessed a surge of 3.9%, 3.6% and 3.3%, respectively, over the past month.

With Leidos Holdings riding high, individuals may rush to add the stock to their portfolio. However, before making any hasty decision, it would be prudent to take a look at the reasons behind the surge, the stock’s growth prospects as well as risks (if any) to investing in the same. The idea is to help investors make a more insightful decision.

What Pushed LDOS Stock Up?

As a company offering diverse products ranging from aerospace and defense products to health information management services as well as cyber security technologies, Leidos enjoys a solid inflow of contracts for its varied products. Keeping up with this trend, LDOS ended 2024 by securing a contract worth $987 million to provide critical engineering and sustainment services for Foreign Military Sales (FMS) customers of the U.S. Air Force's F-16 Falcon jet program in December. 

This month, the company clinched a contract from the Veterans Benefits Administration for performing Medical Disability Examination Services. Such valuable contract wins culminate in a solid backlog count, which bolsters LDOS’ revenue generation prospects. This, in turn, must have boosted investors’ confidence in the stock, which was reflected in its latest share price hike, as mentioned above.

Will LDOS Stock Continue to Grow?

The global defense industry is poised for robust growth, driven by rising geopolitical tensions that have significantly depleted weapon stockpiles and prompted higher defense budgets across developed and developing nations. This surge in spending is accompanied by a growing adoption of data analytics and AI technologies to enhance battlespace awareness and operational efficiency. These advancements are reshaping modern defense strategies, ensuring nations remain prepared for evolving threats. Against this backdrop, S&P 500 defense companies like Leidos Holdings, with an expertise in airborne operations, intelligence, surveillance and reconnaissance, are positioned for steady growth. 

On the other hand, with more investments pouring into life science and public health research following the pandemic, LDOS stands to gain substantially in this space with its core capabilities in providing public health and life science solutions. With strong industry fundamentals and technological integration, Leidos is strategically aligned to benefit in the long run.

In line with this, the Zacks Consensus Estimate for LDOS’ long-term (three-to-five-year) earnings growth is pegged at 14.8%.

A quick sneak peek at its near-term earnings and sales estimates mirrors a similar picture.

LDOS’ Upbeat Estimates

The Zacks Consensus Estimate for 2024 and 2025 sales suggests an improvement of 6.4% and 3.1%, respectively, year over year. 

The Zacks Consensus Estimate for 2024 and 2025 earnings per share has moved north 2.9% and 2.4%, respectively, over the past 60 days.

The upward revision in earnings estimates indicates analysts’ increasing confidence in the stock.

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Risks to Consider Before Choosing LDOS Stock

Despite the aforementioned growth opportunities, there are certain challenges in the industry that one should consider before investing in LDOS. One such headwind is the persistent supply-chain shortage that has been plaguing the defense industry and its players like Leidos Holdings. 

In particular, the shortage of critical materials, such as semiconductors and rare earth elements, which are essential for defense technologies, along with too much global reliance on a handful of nations like China and Russia, has added fuel to the acute supply-chain imbalance that occurred during the pandemic. 

Although the effects of the pandemic have almost worn out, the other challenges mentioned above are not likely to disappear anytime soon. So, the adverse impact of the supply-chain shortage is expected to continue to threaten defense contractors like LDOS, at least in the near term.

LDOS Stock Trading at a Discount

In terms of valuation, LDOS’ forward 12-month price-to-earnings (P/E) is 15.03X, a discount to its industry’s average of 20.88X. This suggests that investors will be paying a lower price than the company's expected earnings growth compared to that of its industry.

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What Should an Investor Do?

To conclude, investors interested in LDOS may add this stock to their portfolio, considering its discounted valuation, long-term growth prospects, solid share price performance as well as upbeat near-term sales and earnings estimates. 

LDOS currently has a VGM Score of A, which is also a favorable indicator of strong performance. The company’s Zacks Rank #2 (Buy) further supports our thesis. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.  
 

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Northrop Grumman Corporation (NOC) : Free Stock Analysis Report

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