What happened

Shares of Leidos Holdings (NYSE:LDOS) traded up nearly 10% on Tuesday after the government services company reported better-than-expected fourth-quarter results. Leidos shares are now up more than 25% year to date, and the company remains optimistic about growth.

So what

Before markets opened Tuesday, Leidos reported fourth-quarter earnings of $1.51 per share on revenue of $2.95 billion, easily surpassing analyst expectations for $1.34 per share on sales of $2.84 billion. Operating income for the quarter was up 38% year over year to $261 million, and operating margin increased by 170 basis points to 8.8%.

Leidos' logo on the front of a building.

Image source: Leidos Holdings.

Net bookings totaled $3 billion in the fourth quarter and $14.5 billion for the year, with more-lucrative intelligence awards accounting for $1.2 billion of the quarterly total.

"Our growth and execution momentum accelerated throughout 2019 and has continued into 2020," CEO Roger Krone said in a statement. "I am confident that we are growing the company with the right talent, the right capabilities and the right strategy to continue to drive value for our customers, employees and shareholders."

Now what

Leidos has gotten off to a great start in 2020, winning a $7.73 billion contract earlier this month to modernize and maintain computer networks for the U.S. Navy and Marine Corps. The company has also announced two large acquisitions in recent months that should diversify its revenue and increase its scale.

Leidos forecast 2020 EPS of $5.30 to $5.65 on revenue between $12.6 billion and $13 billion, compared with analyst expectations for $5.52 per share in earnings on revenue of $12.02 billion. Even after accounting for acquisitions, that is still solid 6% to 8% organic sales growth. Forecast cash flow from operations, at $1 billion, was about $100 million ahead of expectations.

Shares now trade at 1.68 times sales and 22.5 times forward earnings, at the high end of the range for government services companies. Leidos, with its strong and growing portfolio, can justify trading at a premium to most of its rivals, and over time should grow into its valuation. But in the near term, it might be tough for the shares to keep surging at their current pace.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.