Leidos (NYSE:LDOS) Delivers Impressive Q4, Full-Year Outlook Slightly Exceeds Expectations

Defense contractor Leidos (NYSE:LDOS) announced better-than-expected revenue in Q4 CY2024, with sales up 9.7% year on year to $4.37 billion. The company’s full-year revenue guidance of $17.1 billion at the midpoint came in 0.8% above analysts’ estimates. Its non-GAAP profit of $2.37 per share was 4.3% above analysts’ consensus estimates.

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"2024 was a fantastic year for Leidos, as we delivered robust results at or above the high end of our guidance range across all metrics," said Leidos Chief Executive Officer Tom Bell.

Company Overview

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 sales performance can indicate its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Thankfully, Leidos’s 8.5% annualized revenue growth over the last five years was decent. Its growth was slightly above the average industrials company and shows its offerings resonate with customers.

We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Leidos’s annualized revenue growth of 7.6% over the last two years aligns with its five-year trend, suggesting its demand was stable.

Leidos also reports its backlog, or the value of its outstanding orders that have not yet been executed or delivered. Leidos’s backlog reached $43.55 billion in the latest quarter and averaged 5.3% year-on-year growth over the last two years. Because this number is lower than its revenue growth, we can see the company fulfilled orders at a faster rate than it added new orders to the backlog. This implies Leidos was operating efficiently but raises questions about the health of its sales pipeline.

This quarter, Leidos reported year-on-year revenue growth of 9.7%, and its $4.37 billion of revenue exceeded Wall Street’s estimates by 5.6%.

Looking ahead, sell-side analysts expect revenue to grow 1.7% over the next 12 months, a deceleration versus the last two years. This projection doesn't excite us and suggests its products and services will see some demand headwinds.

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Operating Margin

Leidos was profitable over the last five years but held back by its large cost base. Its average operating margin of 7.8% was weak for an industrials business.

On the plus side, Leidos’s operating margin rose by 2.8 percentage points over the last five years, as its sales growth gave it operating leverage.

In Q4, Leidos generated an operating profit margin of 9.6%, in line with the same quarter last year. This indicates the company’s overall cost structure has been relatively stable.

Earnings Per Share

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Leidos’s EPS grew at a remarkable 14.6% compounded annual growth rate over the last five years, higher than its 8.5% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

Diving into Leidos’s quality of earnings can give us a better understanding of its performance. As we mentioned earlier, Leidos’s operating margin was flat this quarter but expanded by 2.8 percentage points over the last five years. On top of that, its share count shrank by 6.9%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business.

For Leidos, its two-year annual EPS growth of 24.5% was higher than its five-year trend. We love it when earnings growth accelerates, especially when it accelerates off an already high base.

In Q4, Leidos reported EPS at $2.37, up from $1.99 in the same quarter last year. This print beat analysts’ estimates by 4.3%. Over the next 12 months, Wall Street expects Leidos’s full-year EPS of $10.22 to grow 4.4%.

Key Takeaways from Leidos’s Q4 Results

We were impressed by how significantly Leidos blew past analysts’ backlog expectations this quarter. We were also excited its revenue outperformed Wall Street’s estimates by a wide margin. Zooming out, we think this quarter featured some important positives. The stock traded up 3.6% to $147.88 immediately after reporting.

Leidos had an encouraging quarter, but one earnings result doesn’t necessarily make the stock a buy. Let’s see if this is a good investment. We think that the latest quarter is only one piece of the longer-term business quality puzzle. Quality, when combined with valuation, can help determine if the stock is a buy. We cover that in our actionable full research report which you can read here, it’s free.