UPDATE: Citigroup Initiates Coverage On Leidos Holdings, Likes Cash Return Potential

Jonathon Raviv of Citigroup initiated coverage of Leidos Holdings Inc (NYSE: LDOS) on Friday with a Buy rating and $55 price target.

“We like Leidos as it's the only stock in our defense services universe to fulfill all three of our investment criteria: margin growth, cash deployment and valuation,” Raviv wrote.

The analyst adds that the company has “stumbled” in the past due to the performance of non-defense businesses. The company's management team is making the right move in getting out of non-core markets while cutting costs and improving operations at the same time, according to Raviv.

Raviv also notes that Leidos Holdings has an attractive cash return potential. Even though shares are levered at 1.8 times EBITDA, its current repurchase authorization represents 11 percent of all shares outstanding. At the same time, the company's excess cash is worth 7 percent of its market cap.

Raviv expects a “strong” free cash flow conversion to continue over the coming years, enhancing shareholder returns that are consistent with management's turnaround plans.