Title: Betting on Defense Stocks: Why This One Might Outshine the Market
Title: Betting on Defense Stocks: Why This One Might Outshine the Market
November 21 was a significant day for defense contracts, particularly for Boeing, with the U.S. Air Force, Navy, and Defense Logistics Agency awarding three contracts totaling just under $4.7 billion for refueling tankers, maritime surveillance aircraft, and V-22 Osprey maintenance work. Meanwhile, less renowned defense firm Dynetics, now a Leidos subsidiary, secured a hefty $670.5 million contract from the U.S. Army for hypersonic missile research and development.
Reportedly, Dynetics is part of a team led by Lockheed Martin, focusing on long-range hypersonic weapons and conventional prompt strike hypersonic missiles for the Army and Navy, respectively. However, the details of Dynetics' assignment remain sparse, with the contract mentioning only its involvement in the "glide body and thermal protection system" for hypersonic weapons systems.
I've been monitoring Leidos, a defense stock, for several years now, having noted its stunning growth. In fact, Leidos became the top-performing defense stock in the U.S. over the past seven years, tripling in share price.
Valuing Leidos
Leidos' valuation averages an enterprise-value-to-free-cash-flow ratio of 1.3 from 2003 to 2023, similar to its current enterprise-value-to-sales (EV/S) ratio of 1.6 and price-to-sales (P/S) of 1.4. Comparatively, the average defense stock has an EV/S of 2.2 and a P/S of 1.8, making Leidos a relatively cheap option.
Considering its competitive valuation and strong free cash flow, Leidos sells at an attractive price-to-earnings (P/E) ratio of 18.2, with a 15.4% long-term expected earnings growth rate and a 1% dividend yield. Its total return ratio is within 10% of "fair value," further emphasizing Leidos' attractive pricing.
Should you buy Leidos stock?
While not quite a bargain, Leidos remains cheaper than most defense stocks. Its third-quarter earnings report showcased impressive sales, earnings, guidance revisions, and contract wins, with bookings outmassing bills more than twice. In fact, the company secured a sizeable $670.5 million hypersonics contract post-quarter-end.
In light of its strong performance and relatively reasonable valuation, Leidos seems an attractive proposition, especially considering the potential for a market downturn.
Enrichment Data:Leidos' contribution to the MACH-TB 2.0 program is essential in advancing U.S. hypersonic capabilities. As part of the subcontractor team led by Kratos Defense & Security Solutions, Leidos provides support for systems engineering, AI&T (integration, assembly, and testing), mission planning, and launch capabilities. This comprehensive contribution aims to reduce costs and increase hypersonic flight test frequency, contributing to the military's strategic focus on hypersonic technology.
- Given Leidos' involvement in the MACH-TB 2.0 program and its focus on hypersonic technology, investors might be interested in exploring potential opportunities for finance and investing in this defense stock.
- Leidos' strategic investments in defense contracts, such as the hypersonics contract, demonstrate the company's commitment to investing in innovative technologies, which could have a positive impact on its financial performance and stock value.