Leidos (LDOS)

Defense contractor Leidos (NYSE:LDOS) missed Wall Street’s revenue expectations in Q4 CY2025, with sales falling 3.6% year on year to $4.21 billion. The company’s full-year revenue guidance of $17.7 billion at the midpoint came in 1.1% below analysts’ estimates. Its non-GAAP profit of $2.76 per share was 5.9% above analysts’ consensus estimates.

Company Overview

Formed through the split of IT services company SAIC, Leidos (NYSE:LDOS) offers technology and engineering solutions such as military training systems for the defense, civil, and health markets.

Defense contractors typically require technical expertise and government clearance. Companies in this sector can also enjoy long-term contracts with government bodies, leading to more predictable revenues. Combined, these factors create high barriers to entry and can lead to limited competition. Lately, geopolitical tensions–whether it be Russia’s invasion of Ukraine or China’s aggression towards Taiwan–highlight the need for defense spending. On the other hand, demand for these products can ebb and flow with defense budgets and even who is president, as different administrations can have vastly different ideas of how to allocate federal funds.

Leidos competes with other major defense and government contractors including Booz Allen Hamilton (NYSE:BAH), Northrop Grumman (NYSE:NOC), Lockheed Martin (NYSE:LMT), General Dynamics (NYSE:GD), and SAIC (NYSE:SAIC). In the healthcare and IT sectors, competitors include Accenture Federal Services, IBM (NYSE:IBM), and Peraton.

A company’s long-term performance is an indicator of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Unfortunately, Leidos’s 6.9% annualized revenue growth over the last five years was mediocre. This wasn’t a great result compared to the rest of the industrials sector, but there are still things to like about Leidos.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Leidos’s recent performance shows its demand has slowed as its annualized revenue growth of 5.5% over the last two years was below its five-year trend. We’re wary when companies in the sector see decelerations in revenue growth, as it could signal changing consumer tastes aided by low switching costs.

We can better understand the company’s revenue dynamics by analyzing its backlog, or the value of its outstanding orders that have not yet been executed or delivered. Leidos’s backlog reached $49 billion in the latest quarter and averaged 20.2% year-on-year growth over the last two years. Because this number is better than its revenue growth, we can see the company accumulated more orders than it could fulfill and deferred revenue to the future. This could imply elevated demand for Leidos’s products and services but raises concerns about capacity constraints.

This quarter, Leidos missed Wall Street’s estimates and reported a rather uninspiring 3.6% year-on-year revenue decline, generating $4.21 billion of revenue.

Looking ahead, sell-side analysts expect revenue to grow 4.4% over the next 12 months, similar to its two-year rate. This projection doesn't excite us and suggests its products and services will face some demand challenges. At least the company is tracking well in other measures of financial health.

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

Leidos has done a decent job managing its cost base over the last five years. The company has produced an average operating margin of 8.8%, higher than the broader industrials sector.

Looking at the trend in its profitability, Leidos’s operating margin rose by 3.9 percentage points over the last five years, as its sales growth gave it operating leverage.

This quarter, Leidos generated an operating margin profit margin of 11.2%, up 1.6 percentage points year on year. This increase was a welcome development, especially since its revenue fell, showing it was more efficient because it scaled down its expenses.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Leidos’s EPS grew at a spectacular 15.5% compounded annual growth rate over the last five years, higher than its 6.9% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

We can take a deeper look into Leidos’s earnings quality to better understand the drivers of its performance. As we mentioned earlier, Leidos’s operating margin expanded by 3.9 percentage points over the last five years. On top of that, its share count shrank by 10.4%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business.

For Leidos, its two-year annual EPS growth of 28.2% was higher than its five-year trend. We love it when earnings growth accelerates, especially when it accelerates off an already high base.

In Q4, Leidos reported adjusted EPS of $2.76, up from $2.37 in the same quarter last year. This print beat analysts’ estimates by 5.9%. Over the next 12 months, Wall Street expects Leidos’s full-year EPS of $11.99 to grow 1.6%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Leidos has shown decent cash profitability, giving it some flexibility to reinvest or return capital to investors. The company’s free cash flow margin averaged 7.3% over the last five years, slightly better than the broader industrials sector.

Taking a step back, we can see that Leidos’s margin expanded by 2.7 percentage points during that time. This is encouraging because it gives the company more optionality.

Leidos’s free cash flow clocked in at $452 million in Q4, equivalent to a 10.7% margin. This result was good as its margin was 5.9 percentage points higher than in the same quarter last year, building on its favorable historical trend.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Leidos’s management team makes decent investment decisions and generates value for shareholders. Its five-year average ROIC was 11.9%, slightly better than typical industrials business.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Leidos’s ROIC has increased over the last few years. This is a great sign when paired with its already strong returns. It could suggest its competitive advantage or profitable growth opportunities are expanding.

Leidos reported $1.11 billion of cash and $5.24 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $2.42 billion of EBITDA over the last 12 months, we view Leidos’s 1.7× net-debt-to-EBITDA ratio as safe. We also see its $203 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

It was encouraging to see Leidos beat analysts’ EBITDA expectations this quarter. We were also glad its EPS outperformed Wall Street’s estimates. On the other hand, its revenue missed and its full-year revenue guidance fell slightly short of Wall Street’s estimates. Overall, this was a weaker quarter. The stock traded down 2.4% to $172.14 immediately after reporting.

Updated: February 17, 2026 at 6:13 AM EST

A common mistake we notice when investors are deciding whether to buy a stock or not is that they simply look at the latest earnings results. Business quality and valuation matter more, so we urge you to understand these dynamics as well.

There are a lot of things to like about Leidos. Although its revenue growth was mediocre over the last five years and analysts expect growth to slow over the next 12 months, its backlog growth has been marvelous. And while its projected EPS for the next year is lacking, its spectacular EPS growth over the last five years shows its profits are trickling down to shareholders.

Leidos’s EV-to-EBITDA ratio based on the next 12 months is 1.7x. Looking at the industrials space right now, Leidos trades at a compelling valuation. If you’re a fan of the business and management team, now is a good time to scoop up some shares.

Wall Street analysts have a consensus one-year price target of $219.31 on the company (compared to the current share price of $172.14), implying they see 27.4% upside in buying Leidos in the short term.