Yahoo Finance Leidos's (NYSE:LDOS) Q2 Sales Top Estimates
Defense contractor Leidos (NYSE:LDOS) reported Q2 CY2024 results topping analysts' expectations , with revenue up 7.7% year on year to $4.13 billion. The company expects the full year's revenue to be around $16.25 billion, in line with analysts' estimates. It made a non-GAAP profit of $2.63 per share, improving from its profit of $1.80 per share in the same quarter last year.
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Leidos (LDOS) Q2 CY2024 Highlights:
Revenue: $4.13 billion vs analyst estimates of $4.06 billion (1.7% beat)
EPS (non-GAAP): $2.63 vs analyst estimates of $2.27 (15.8% beat)
The company raised its revenue and EPS guidance for the full year
Gross Margin (GAAP): 17.1%, up from 14.8% in the same quarter last year
Free Cash Flow of $351 million, up from $46 million in the previous quarter
Backlog: $36.49 billion at quarter end, up 6.8% year on year
Market Capitalization: $20.68 billion
Thomas Bell, Leidos Chief Executive Officer, commented, "In the second quarter, Leidos continued its industry-leading profitable growth and strong cash generation, showcasing the progress we've made towards our key operational priorities and the dedication to our "Promises Made, Promises Kept" philosophy.
Formed through the split of IT services company SAIC, Leidos (NYSE:LDOS) offers technology and engineering solutions such as military training systems for the defense, civil, and health markets.
Defense Contractors
Defense contractors typically require technical expertise and government clearance. Companies in this sector can also enjoy long-term contracts with government bodies, leading to more predictable revenues. Combined, these factors create high barriers to entry and can lead to limited competition. Lately, geopolitical tensions–whether it be Russia’s invasion of Ukraine or China’s aggression towards Taiwan–highlight the need for defense spending. On the other hand, demand for these products can ebb and flow with defense budgets and even who is president, as different administrations can have vastly different ideas of how to allocate federal funds.
Sales Growth
A company’s long-term performance can give signals about its business quality. Even a bad business can shine for one or two quarters, but a top-tier one tends to grow for years. Thankfully, Leidos's 8.7% annualized revenue growth over the last five years was decent. This shows it was successful in expanding, a useful starting point for our analysis.
Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Leidos's recent history shows its demand slowed as its annualized revenue growth of 6.7% over the last two years is below its five-year trend.
We can better understand the company's revenue dynamics by analyzing its backlog, or the value of its outstanding orders that have not yet been executed or delivered. Leidos's backlog reached $36.49 billion in the latest quarter and averaged 2.8% year-on-year growth over the last two years. Because this number is lower than its revenue growth, we can see the company hasn't secured enough new orders to maintain its growth rate in the future.
This quarter, Leidos reported solid year-on-year revenue growth of 7.7%, and its $4.13 billion of revenue outperformed Wall Street's estimates by 1.7%. Looking ahead, Wall Street expects sales to grow 3.4% over the next 12 months, a deceleration from this quarter.
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Operating Margin
Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses–everything from the cost of goods sold to advertising and wages. It's also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.
Leidos was profitable over the last five years but held back by its large expense base. It demonstrated mediocre profitability for an industrials business, producing an average operating margin of 7.5%.
Looking at the trend in its profitability, Leidos's annual operating margin decreased by 2.5 percentage points over the last five years. The company's performance was poor no matter how you look at it. It shows operating expenses were rising and it couldn't pass those costs onto its customers.
This quarter, Leidos generated an operating profit margin of 11.5%, up 2.9 percentage points year on year. This increase was a welcome development and shows it was recently more efficient because its expenses grew slower than its revenue.
EPS
We track the long-term growth in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company's growth was profitable.
Leidos's EPS grew at a remarkable 14.6% compounded annual growth rate over the last five years, higher than its 8.7% annualized revenue growth. However, this alone doesn't tell us much about its day-to-day operations because its operating margin didn't expand.
We can take a deeper look into Leidos's earnings to better understand the drivers of its performance. A five-year view shows that Leidos has repurchased its stock, shrinking its share count by 6.8%. This tells us its EPS outperformed its revenue not because of increased operational efficiency but financial engineering, as buybacks boost per share earnings.
Like with revenue, we also analyze EPS over a more recent period because it can give insight into an emerging theme or development for the business. For Leidos, its two-year annual EPS growth of 17% was higher than its five-year trend. We love it when earnings growth accelerates, especially when it accelerates off an already high base.
In Q2, Leidos reported EPS at $2.63, up from $1.80 in the same quarter last year. This print easily cleared analysts' estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Leidos to perform poorly. Analysts are projecting its EPS of $8.94 in the last year to shrink by 2% to $8.77.
Key Takeaways from Leidos's Q2 Results
We enjoyed seeing Leidos exceed analysts' EPS expectations this quarter. We were also excited its revenue outperformed Wall Street's estimates. That the company raised its full year revenue and EPS guidance is icing on the cake. Zooming out, we think this was a strong quarter, showing the company is staying on track. The stock traded up 4.1% to $159.22 immediately after reporting.
So should you invest in Leidos right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.
