Avoiding the Vanity Space Race: Leidos Holdings (LDOS)
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FLY ME TO THE MOON? Leidos offers the Only REASONABLY VALUED ride.
Maybe, just maybe, space is not the place for billionaires with big ideas. Maybe moving man and machine into orbit is better served by bland-ish technocrats. After all, if getting 120 miles – or 120 million miles – above the earth’s surface is the goal, wouldn’t teams of experts, working together in applied space information and engineering groups, be the time-tested approach?
That kind of sensible space logistics firm would not be focused on the dreams and vanities of a single person, as SpaceX, Blue Origin, or Virgin Galactic (SPCE) are. Rather, success would be measured in tangible contracts awarded by established public and private organizations. These groups would pay a fair price to solve the problems of passing in and out of the earth’s atmosphere safely.
The ideal space logistics enterprise would not be weighed down by a traditional aerospace past, like say Boeing (BA) and Lockheed Martin (LMT). The number of traditional aircraft sold would not trump that firm’s steps into space. Success in space would be viewed as a solution, not a ship. Reasonable innovation getting where no person has gone before, would occur side by side with other engineering specialties found in defense, surveillance, transportation and maybe even healthcare.
What’s fascinating is the template for such a well-structured, profitable space applied logistics firm exists: Huntsville, Alabama-based Dynetics, a unit of a $14.8 billion science, engineering, and IT giant Leidos Holdings (LDOS). As to why Leidos Holdings is not the investment choice for those who wish to bet on the space race – and still sleep at night – has not been a question we could find a sensible answer for.
It’s not like Dynetics doesn’t sell tested space propulsion, mission design, system integration and vehicle development and manufacturing. It does. It’s not like the established space community doesn’t already pay Leidos big money. Last month, the operation was awarded a $2.5 billon contract to build the communication systems NASA needs to return to the Moon.
Dynetics won a $2.5 billion contract for the NASA’s human lander for its return to the moon.
It’s not like Leidos doesn’t tell its story to the world: It sponsored two of our favorite Olympic track and field stars: Raven Saunders and Gabby Thomas. Thomas is the Harvard-grad sprinter who won a bronze medal in the 200 meters dash in the recent Tokyo Olympics.
Nor does Leidos produce anything other than stellar financial results: Annual revenues have grown consistently, over the past half decade, from about $7.0 billion in 2016 to $12.3 billion in 2021. Operating cash flow, essentially unheard of in the space business, also grew over the same period: From $449 million to $1.3 billion. If you back out capital expenditures, this operation threw off something like $1.2 billion of free cash flow in the past 12 months.
Leidos captured $1.2 Billion in free cash in 2020. Blue Origin spent $5.1 billion.
In comparison, Jeff Bezos spent $5.1 billion for a 10-minute space ride on his recently launched Blue Origin mission.
Unlike elsewhere in space travel, Leidos gave investors returns for their money. Over the past 5 years, the operation posted roughly a 13% return on operations. Though its debt load can be high, over the past 5 years, the cash-to-debt ratio hovered in the single digits, the enterprise supports a reasonable 1.5% dividend.
Reasonable book value per share estimates peg the operation assets to be worth $27.20. Yet, price-to-earnings ratios have been roughly $20 for the past 100 days or so. Technically, Leidos is undervalued.
What Leidos, and its subsidiary Dynetics, appear to be missing from a valuation perspective, is the media-savvy personality, like Jeff Bezos, Elon Musk and Richard Branson, to drive media buzz.
But honestly, having now a month or so to realize how utterly forgettable these billionaire’s first forays into space have been, is that such a loss?