Leidos

At face value, Leidos Holdings Inc looks inexpensive, following a substantial price decline over the past year. To account for the risk of a possible value trap, we have capped its rating at 3 stars. The stock currently trades at a 26% discount to our quantitative fair value estimate of $164.41 per share; however, some caution is warranted due to this estimate's medium uncertainty rating.

The company's valuation metrics strengthen our estimated fair value. A company's valuation metrics provide insights into the market's expectations for its future growth and profitability. Reflecting the firm's valuation is its enterprise value to revenue ratio of 1.2, which falls in the bottom 40% compared with peers globally. The prevailing enterprise value/sales ratio is low relative to the long-term earnings power of the business. We believe this is a sign that shares could be undervalued.

The company's profitability is an additional encouraging factor. Highly profitable companies are often more resilient in recessions and are likely to generate stronger future cash flows for shareholders. The firm's earnings yield of 9.9%, for example, ranks in the top 20% compared with global peers. This suggests that it is generating substantial earnings relative to its share price, which further promotes our favorable price/fair value ratio.

The company's narrow economic moat rating suggests it should be able to maintain robust profitability for a decade or longer before competition erodes its advantage. In addition, the company's moderate financial health score is decent and doesn't seriously concern us with regard to financial distress.