We recently compiled a list of the 10 Undervalued Aerospace Stocks To Buy According to Analysts. In this article, we are going to take a look at where Leidos Holdings, Inc. (NYSE:LDOS) stands against the other undervalued aerospace stocks.
The International Aerospace and Defense industry
The aerospace and defense industry is a fast-growing industry, mainly because of the increased global travel after the pandemic and increased geopolitical tensions, which has led to increased government spending on defense. According to Research and Markets, the global aerospace and defense industry was valued at $884 billion in 2023. The industry is expected to grow at a compound annual growth rate of 5.8% to reach $1.23 trillion by 2028. Growth in the sector pertains to the rise in military modernization and increased defense spending. Whereas, increased spending on air travel is contributing to the growth in the commercial aerospace industry.
Geopolitics and Increased Spending on Defense
The world has been in a straight of turmoil, with geopolitical tensions leading to wars. While war and geo-political tensions are a dealbreaker for many industries, for the aerospace and defense companies the story is different. One of the key drivers of revenue for such companies is government contracts for military-grade aircraft, weapons, and defense systems. Thereby, with increased risks of war, defense spending goes up and aerospace and defense companies land more contracts.
According to a report by CNBC on April 22, global military spending hit an all-time high in 2023 after a 7% ramp-up. The global military spending was at a record high of $2.4 trillion last year. One of the key drivers of increased defense spending has been the prolonged Russia-Ukraine conflict and the recent tensions between Israel and Palestine. During the previous year the United States, China, and Russia were noted to be the biggest military spenders.
According to the U.S. Department of Defense, the government has $2.09 trillion in budgetary resources and plans to spend $972.88 Billion during 2024, out of which $229.80 billion is designated for award obligations. This indicates increased business opportunities for aerospace and defense companies during the year.
Upcoming Trends in the Aerospace Industry
According to a survey conducted by McKinsey & Company, AI-powered advancements can reshape aircraft maintenance, repair, and overhaul, however, companies need to accept the digital transformation.
Aircraft fleet management is a challenging sector. In the US alone, airline companies have witnessed a 15% increase in maintenance costs during the past 5 years. Moreover, there has been a 14% increase in flight delays due to maintenance.
The maintenance, repair, and overhaul (MRO) can be optimized using AI-powered solutions that allow better performance and improve efficiency. For Instance, AI-powered MRO can predict proper maintenance needs for an aircraft and the labor, material, and time needed for the maintenance. However, to leverage the power of AI, maintenance companies would have to become comfortable with adapting to new technologies and deal with the status quo disruption. The survey by McKinsey & Company found that only 33% of their respondents believed digital adoption to be critically important in achieving organizational objectives. Whereas 70% believed it could become critically important in the next 3 to 5 years, indicating hesitation towards immediate adoption of AI-powered solutions in the MRO sector.
Our Methodology
To compile the list of 10 undervalued aerospace stocks to buy according to analysts we used the Finviz stock screener and iShares U.S. Aerospace & Defense ETF. We aggregated a list of stocks that operated in the aerospace and defense industry and filtered stocks that had a forward P/E ratio of less than 22 and a positive earnings growth rate. These stocks are cheaper than the market, which currently has a forward P/E of 22 (according to data from WSJ).
Once we had our filtered list, we ranked these stocks based on the average price target upside as per Wall Street analysts. The stocks are ranked in ascending order of the average price target upside as of August 15, 2024.
At Insider Monkey we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A close-up of an engineer working on the development of a new air navigation system.
Leidos Holdings, Inc. (NYSE:LDOS)
Average Price Target Upside as of August 15: 13.68%
Forward P/E as of August 15: 16
Leidos Holdings, Inc. (NYSE:LDOS) is a leading technology company that provides defense, health, intelligence, and civil services technology to government agencies such as the Department of Defense and NASA, as well as international allies of the United States. The Defense Solutions segment provides advanced technology systems to support military operations across air, land, sea, space, and cyber security. Moreover, the company also provides air navigation systems to the Federal Aviation Administration and develops technologies that help control air traffic.
The strength of Leidos Holdings, Inc. (NYSE:LDOS) lies in its ability to drive strong organic growth and that too while maintaining high margins. During the second quarter of 2024, the company grew its revenue by 7.7% year-over-year to reach $4.13 billion. Although the revenue growth was backed by a robust performance across the board, however, the Health and Civil segment remained the strongest contender with revenue for the segment growing more than 22% year-over-year.
While revenue increase is impressive, what’s more notable is the company’s adjusted EBITDA margins which grew 260 base points to reach 13.5% during the quarter. Moreover, the adjusted EBITDA also increased to its record high of $559 million improving 33% from the previous year.
Management has been dedicated to delivering promises to its shareholders. It has significantly cut expenses and has stayed focused on robust cash flow. During the quarter Leidos Holdings, Inc. (NYSE:LDOS) generated a strong operating cash flow of $374 million and was able to maintain a strong liquidity position with more than $777,000 in cash and cash equivalents.
Leidos Holdings, Inc. (NYSE:LDOS) is cheap at current levels. It is trading at 16 times its forward earnings, which is a 12% discount to its sector. Moreover, its earnings are also forecasted to grow by 7% during the year to reach $2.12. 17 analysts have a strong buy rating on the stock, with their 12-month median price target of $167.5 presenting an upside of 13.68% from the current level.
Wedgewood SMID Cap Strategy made the following comment about Leidos Holdings, Inc. (NYSE:LDOS) in its Q1 2023 investor letter:
“Top performance detractors for the quarter include First Republic Bank, Texas Pacific Land, Leidos Holdings, Inc. (NYSE:LDOS), Helen of Troy and IAA. Finally, and unfortunately—as we’ve discussed in these letters previously in commentary on Leidos – it appears a new Cold War may be emerging, and we believe this will spur long-term demand for the U.S. military, industrial, and energy industries, as we already have seen on the energy front, especially, with exports to European allies rising significantly since Russia’s invasion of Ukraine.”
Overall LDOS ranks 8th on our list of the best undervalued aerospace stocks to buy. While we acknowledge the potential of LDOS as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than LDOS but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
