As the IT industry is expanding with cutting-edge technologies and solutions, the demand for IT services has been on an uptrend. Amid this, let’s look into fundamentally sound stocks Leidos Holdings, Inc. (LDOS), PC Connection, Inc. (CNXN), and Mastech Digital, Inc. (MHH). But first, let’s look into the factors propelling the market’s growth.

With the need to embrace new technological solutions, there has been a steady increase in demand for IT services that ensure business continuity and fuel business resilience to weather future disruption.

Moreover, the increased demand for cloud services and infrastructure upgrading activities is significantly driving the demand for managed IT services across the emerging market, with global IT spending projected to be $4.6 trillion in 2023, reflecting an increase of 5.5% from 2022.

Given the ongoing digital transformation and automated business processes, the global IT Services market is projected to reach $1.32 trillion by 2027, growing at a CAGR of 4.1%. Furthermore, investors’ interest in IT stocks is evident from the Vanguard Information Technology Index Fund ETF Shares’ (VGT) 21.7% returns year-to-date.

Additionally, over the past few months, inflation risk has been dropping while recession risk is increasing. Market sentiments have grown increasingly clear that the economy is slowing, exacerbated by the Fed’s hawkish stance.

Nonetheless, with interest rate hikes nearing their end, it could lead to the outperformance of high-growth tech stocks.

BofA technical strategist Stephen Suttmeier believes various technical indicators are signaling the stock market is equipped to push higher by as much as 5% over the summer. He further advises investors to make use of the drop by “buying a May dip for a summer rip.”

With these factors in mind, let’s dig deeper into the fundamentals of the stocks mentioned above.

Leidos Holdings, Inc. (LDOS)

LDOS offers services and solutions in the defense, intelligence, civil, and health sectors. It operates through three segments, Defense Solutions; Civil; and Health. It also provides cloud computing, application modernization, DevOps, network modernization, environment, energy, and infrastructure services.

On April 18, the company was awarded a new prime contract to develop an Uncrewed Aircraft System (UAS) that can autonomously resupply forward-deployed ground forces for the U.S. Marine Corps. This contract reflects the company’s strong demand over its peers and could help generate substantial revenues for its defense segment.

On March 31, the Leidos Partnership for Defense Health (LPDH) declared that as part of its most recent double-wave deployment, an additional 14,000 physicians and providers received the MHS GENESIS electronic health record. With each deployment, MHS GENESIS successfully applies industry best practices to boost clinical results. This could strategically benefit the company.

LDOS’ trailing-12-month ROCE of 16.07% is 16.2% higher than the 13.83% industry average. Its trailing-12-month ROTC and ROTA of 7.08% and 5.21% compare to the industry averages of 6.80% and 5.07%, respectively.

For the first quarter that ended March 31, 2023, LDOS’ revenue from the Defense Solutions segment grew 3.1% from the year-ago value to $2.11 billion, while revenue from the Civil segment rose 10.3% year-over-year to $877 million. The company’s total revenues increased 5.9% year-over-year to $3.69 billion.

Furthermore, as of March 31, 2023, LDOS’ total current assets stood at $3.65 billion as compared to $3.64 billion on December 31, 2022.

The consensus revenue estimate of $3.73 billion for the second quarter (ending June 30, 2023) reflects a 3.7% year-over-year increase. The consensus EPS estimate of $1.59 for the ongoing quarter indicates a marginal rise from the same period last year. Moreover, LDOS surpassed its consensus EPS estimates in three of four trailing quarters, which is promising.

LDOS’ revenue and EBITDA have increased at CAGRs of 8.6% and 8.2%, respectively, over the past three years, while its EPS has grown at a 5.9% CAGR.

Shares of LDOS have lost marginally over the past five days to close the last trading session at $78.32.

LDOS’ POWR Ratings reflect its strong outlook. The stock has an overall rating of B, which equates to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.

The stock has a B grade for Value. In the 80-stock Technology – Services industry, it is ranked #24.

Beyond what we stated above, we also have LDOS ratings for Growth, Momentum, Stability, Sentiment, and Quality. Get all LDOS ratings here.

PC Connection, Inc. (CNXN)

CNXN provides various IT solutions and offers services for designing, configuring, and implementing them. The company operates through three segments: Business Solutions; Enterprise Solutions; and Public Sector Solutions. It serves Small to Medium-sized Businesses (SMBs) and medium-to-large corporate accounts through telemarketing, advertisement, and marketing programs.

Recently, the company was named HP U.S. Print Hardware National Solution Provider (NSP) Partner of the Year at the HP AMPLIFY partner conference for its outstanding performance and leading growth.

CNXN’s trailing-12-month ROCE and ROTA of 11.02% and 7.30% are significantly higher than the 0.97% and 0.39% industry averages. Moreover, its trailing-12-month ROTC of 9.11% is 325.4% higher than the industry average of 2.14%.

CNXN’s revenue amounted to $727.55 million in the first quarter of the fiscal year 2023, which ended on March 31, while its gross margin grew by 53 basis points from the year-ago period to 16.8%.

The company reported a non-GAAP net income and adjusted EBITDA of $14.85 million and $25.25 million, respectively, while its adjusted EPS came in at $0.56 in the same period.

In addition, its cash and cash equivalents of $134.81 million increased 9.7% from $122.93 million as of December 31, 2022.

Street expects CNXN’s EPS and revenue to increase 2.3% and 4.8% year-over-year to $0.90 and $812.69 million, respectively, in the fiscal second quarter (ending June 30, 2023).

Over the past three years, CNXN’s tang book value and total assets have grown at 10.3% and 6.9% CAGRs, respectively. Moreover, its levered free cash flow has improved at 41.7% CAGR over the same period.

Over the past five days, the stock has gained 7% to close the last trading session at $41.66.

CNXN’s POWR Ratings reflect its solid prospects. The stock has an overall rating of B, translating to Buy in our proprietary rating system.

It also has a B grade for Momentum, Stability, and Quality. Within the same industry, it is ranked #8. Click here to see the additional ratings for CNXN (Growth, Value, and Sentiment).

Mastech Digital, Inc. (MHH)

MHH engages in the provision of digital transformation information technology services to large, medium-sized, and small companies in the United States. It operates through the following segments: Data & Analytics Services; and Information Technology (IT) Staffing Services.

The stock’s trailing-12-month ROTC and ROTA of 7.29% and 6.10% compare to the industry averages of 6.80% and 5.07%, respectively. Moreover, the company’s trailing-12-month asset turnover ratio of 2.11x is 162.8% higher than the 0.80x industry average.

For the fiscal 2023 first quarter that ended March 31, MHH’s net revenue amounted to $55.06 million, while its non-GAAP net income and non-GAAP EPS stood at $1.40 million and $0.12, respectively.

As of March 31, 2023, the company’s cash and cash equivalents came in at $9.10 million, representing an increase of 28.9% from $7.06 million for the period that ended December 31, 2022, while its total current assets rose 2.5% from $53.17 million in the prior-period to $54.53 million.

Analysts expect MHH’s revenue to increase 12.1% year-over-year to $249.46 million for the fiscal year 2024. The company’s EPS for the next year is expected to improve 104.9% from the prior year to $1.48.

Its revenue has grown at 6.1% and 8.5% CAGRs over the past three and five years, respectively, while its tang book value improved at a 127.8% CAGR over the past three years.

The stock has gained marginally over the past five days to close the last trading session at $9.13.

MHH’s solid fundamentals are apparent in its POWR Ratings. The stock has an overall rating of B, equating to Buy in our proprietary rating system. It has an A grade for Value and a B for Stability and Quality. It is ranked #19 of 80 stocks in the Technology – Services industry.

In addition to the POWR Ratings I’ve just highlighted, you can see MHH ratings for Growth, Momentum, and Sentiment here.

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LDOS shares were trading at $77.36 per share on Tuesday afternoon, down $0.96 (-1.23%). Year-to-date, LDOS has declined -26.17%, versus a 7.93% rise in the benchmark S&P 500 index during the same period.

About the Author: Shweta Kumari

Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions. More...

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