Earnings

A Side-by-side Analysis of Leidos Holdings, Inc. (LDOS) and Nektar Therapeutics (NKTR)

Leidos Holdings, Inc. (NYSE:LDOS) shares are up more than 7.33% this year and recently decreased -0.06% or -$0.04 to settle at $69.30. Nektar Therapeutics (NASDAQ:NKTR), on the other hand, is up 72.74% year to date as of 03/13/2018. It currently trades at $103.16 and has returned 5.17% during the past week.

Leidos Holdings, Inc. (NYSE:LDOS) and Nektar Therapeutics (NASDAQ:NKTR) are the two most active stocks in the market based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.

Growth

One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect LDOS to grow earnings at a 9.20% annual rate over the next 5 years. Comparatively, NKTR is expected to grow at a -7.30% annual rate. All else equal, LDOS’s higher growth rate would imply a greater potential for capital appreciation.



Profitability and Returns

Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. Leidos Holdings, Inc. (LDOS) has an EBITDA margin of 7.74%. This suggests that LDOS underlying business is more profitable LDOS’s ROI is 6.40% while NKTR has a ROI of -18.10%. The interpretation is that LDOS’s business generates a higher return on investment than NKTR’s.

Cash Flow 




Cash is king when it comes to investing. LDOS’s free cash flow (“FCF”) per share for the trailing twelve months was +1.34. Comparatively, NKTR’s free cash flow per share was +0.57. On a percent-of-sales basis, LDOS’s free cash flow was 2% while NKTR converted 0.03% of its revenues into cash flow. This means that, for a given level of sales, LDOS is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. LDOS has a current ratio of 1.20 compared to 5.80 for NKTR. This means that NKTR can more easily cover its most immediate liabilities over the next twelve months. LDOS’s debt-to-equity ratio is 0.92 versus a D/E of 0.00 for NKTR. LDOS is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

LDOS trades at a forward P/E of 14.78, a P/B of 3.19, and a P/S of 1.06, compared to a P/B of 187.56, and a P/S of 52.84 for NKTR. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. LDOS is currently priced at a -12.06% to its one-year price target of 78.80. Comparatively, NKTR is 12.66% relative to its price target of 91.57. This suggests that LDOS is the better investment over the next year.

The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 1.70 for LDOS and 1.70 for NKTR, which implies that analysts are equally bullish on their outlook for the two stocks.

Risk and Volatility

No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. LDOS has a beta of 1.69 and NKTR’s beta is 1.90. LDOS’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. LDOS has a short ratio of 1.95 compared to a short interest of 4.17 for NKTR. This implies that the market is currently less bearish on the outlook for LDOS.

Summary

Leidos Holdings, Inc. (NYSE:LDOS) beats Nektar Therapeutics (NASDAQ:NKTR) on a total of 10 of the 14 factors compared between the two stocks. LDOS is growing fastly, is more profitable, generates a higher return on investment, has higher cash flow per share and has a higher cash conversion rate. In terms of valuation, LDOS is the cheaper of the two stocks on book value and sales basis, LDOS is more undervalued relative to its price target. Finally, LDOS has better sentiment signals based on short interest.

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