Drop Verint Systems, Pick These Defense Stocks?

If you are an investor in  Verint Systems (NASDAQ:VRNT) – a company that sells products and services for customer experience automation – and are disappointed with the stock’s 11% drop last week following its earnings miss and sluggish revenue growth, it may be time to look elsewhere. As of this moment, we find that Leidos (NYSE:LDOS) – a defense, aviation, IT, and biomedical research company – and Huntington Ingalls Industries (NYSE: HII) – the largest military shipbuilding company – appear to be more attractive than Verint Systems.

Why? Simply because the valuation and growth numbers tell us so. Leidos and Huntington Ingalls Industries stocks have both seen higher growth in revenue and operating profits than Verint Systems in the last twelve months, as well as the most recent quarter. Not only that, they’re both cheaper than Verint Systems.

In fact, the strategy of thoughtfully shifting allocation to more attractive stocks is part of our market outperforming Trefis High Quality Portfolio (HQ) – which beat the S&P 500 in 2023 handily despite being meaningfully underweight the Magnificent 7 stocks. Full HQ performance story here.

Better Buys Than VRNT – LDOS & HII Stocks?

Specifically, to illustrate the opportunity for Leidos, you pay $12.93 per dollar of earnings-before-interest-and taxes (EBIT) for LDOS stock versus $19.48 for VRNT, and get higher annual growth (7.9% vs 1.6%), higher quarterly growth (7.7% vs 2.2%), and better margin trend (2.1% vs 1.9%). Overall, you get higher revenue, and operating profit growth from Leidos and Huntington Ingalls Industries, and pay less than VRNT stock. See our complete dashboard analysis of Better Bets Than VRNT Stock

So What’s The Catch?

Now, could Verint Systems buck the trend? Could it grow its revenues and profits much faster than Leidos or Huntington Ingalls Industries in the coming quarters? Of course that’s possible.  While Verint’s sales growth was muted over the last quarter, the company could see some upside from artificial intelligence. Over Q2 FY’25, bookings for AI rose by over 40% year-over-year. The company’s software as a service revenue growth also accelerated to 15% year-over-year, driven by AI. The company says that its customers are seeing significant returns on investment from Verint’s AI-powered bots, and this could translate into stronger AI booking and revenue growth going forward.

The data below shows both Leidos and Huntington Ingalls Industries outperformed Verint Systems recently and over the last year. They might repeat this. Related ideas: Better Buys and Outperformers

Pay Less Per Dollar Of Profit (EBIT) Than Verint Systems, To Get More Revenue And Profit Growth?

HII has seen the strongest revenue growth of the three in the last twelve months, followed by LDOS. VRNT has seen the slowest growth over the period. Moreover, HII and LDOS have seen higher margin expansion compared to VRNT. However, despite this, VRNT stock trades at a higher price-to-operating income ratio of almost 19.4x, compared to levels of roughly 13x to 14x for LDOS and HII.

What About Relative Market Returns?

LDOS stock has shown a stronger market performance, with returns of 62% over the past 12 months, and 21% over the past 6 months. In comparison, VRNT returns for the same periods were weaker at 8% and -14.5%, respectively.

How Did These Metrics Look 1 Year Ago – Could VRNT’s Combination Of Higher Valuation & Lower Growth Persist?

VRNT still had a higher valuation of 32.05x vs 11.23x for LDOS but lower annual growth (1.1% vs 5.5%), lower quarterly growth (-0.6% vs 6.7%), although it did see a more favorable margin change (2.5% vs -0.1%).

Investment Thesis for Leidos and Huntington Ingalls Industries

Leidos operates in the defense, aviation, information technology, and biomedical research space, putting the company in a good position to benefit from rising defense budgets, amid geopolitical tensions. The company derives a majority of its revenue via long-term contracts with government agencies including the U.S. Department of Defense and Department of Homeland Security, giving the company a stable revenue stream even in the event of economic headwinds. The company is likely to grow revenues by about 6% this year, per consensus estimates, and trades at about 16x forward earnings.

Huntington Ingalls Industries is the largest military shipbuilder in the United States. The company builds nuclear-powered aircraft carriers and submarines and has long-term contracts with the U.S. Navy, ensuring considerable revenue visibility. The company’s total bookings backlog stood at $48.5 billion as of the most recent quarter. HII also stands to benefit from mounting geopolitical tensions as well as the U.S. Navy’s intention of modernizing its fleet. The stock trades at about 16x forward earnings.

Here’s more on Trefis’ market-beating portfolios, including HQ with downside protection.

[1] Returns as of 9/9/2024
[2] Cumulative total returns since the end of 2016

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