Leidos (LDOS)

Defense contractor Leidos (NYSE:LDOS) reported revenue ahead of Wall Streets expectations in Q3 CY2025, with sales up 6.7% year on year to $4.47 billion. The company expects the full year’s revenue to be around $17.13 billion, close to analysts’ estimates. Its non-GAAP profit of $3.05 per share was 12.3% 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 sales performance is one signal of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Thankfully, Leidos’s 7.6% annualized revenue growth over the last five years was decent. Its growth was slightly above the average industrials company and shows its offerings resonate with customers.

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 annualized revenue growth of 6.9% over the last two years aligns with its five-year trend, suggesting its demand was consistently weak.

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 $47.66 billion in the latest quarter and averaged 15.2% 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 reported year-on-year revenue growth of 6.7%, and its $4.47 billion of revenue exceeded Wall Street’s estimates by 4.1%.

Looking ahead, sell-side analysts expect revenue to grow 2% over the next 12 months, a deceleration versus the last two years. This projection doesn't excite us and indicates its products and services will face some demand challenges. At least the company is tracking well in other measures of financial health.

Leidos has done a decent job managing its cost base over the last five years. The company has produced an average operating margin of 8.7%, higher than the broader industrials sector.

Looking at the trend in its profitability, Leidos’s operating margin rose by 3.1 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 12%, in line with the same quarter last year. This indicates the company’s overall cost structure has been relatively stable.

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 15.2% compounded annual growth rate over the last five years, higher than its 7.6% 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 to better understand the drivers of its performance. As we mentioned earlier, Leidos’s operating margin was flat this quarter but expanded by 3.1 percentage points over the last five years. On top of that, its share count shrank by 9.7%. 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 27.6% was higher than its five-year trend. We love it when earnings growth accelerates, especially when it accelerates off an already high base.

In Q3, Leidos reported adjusted EPS of $3.05, up from $2.93 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Leidos’s full-year EPS of $11.60 to stay about the same.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because 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 6.6% 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 3.3 percentage points during that time. This is encouraging because it gives the company more optionality.

Leidos’s free cash flow clocked in at $680 million in Q3, equivalent to a 15.2% margin. This cash profitability was in line with the comparable period last year and above its five-year average.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared 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 11.7%, 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 $974 million of cash and $5.23 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 $2.37 billion of EBITDA over the last 12 months, we view Leidos’s 1.8× net-debt-to-EBITDA ratio as safe. We also see its $100 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.

We were impressed by how significantly Leidos blew past analysts’ backlog expectations this quarter. We were also excited its EBITDA outperformed Wall Street’s estimates by a wide margin. On the other hand, its full-year revenue guidance was in line. Zooming out, we think this quarter featured some important positives. The stock traded up 2.7% to $198.29 immediately following the results.

Updated: December 4, 2025 at 10:35 PM EST

When considering an investment in Leidos, investors should account for its valuation and business qualities as well as what’s happened in the latest quarter.

In our opinion, Leidos is a good company. First off, its revenue growth was decent over the last five years. And while its projected EPS for the next year is lacking, its backlog growth has been marvelous. On top of that, its spectacular EPS growth over the last five years shows its profits are trickling down to shareholders.

Leidos’s P/E ratio based on the next 12 months is 16x. When scanning the industrials space, Leidos trades at a fair valuation. For those confident in the business and its management team, this is a good time to invest.

Wall Street analysts have a consensus one-year price target of $218.08 on the company (compared to the current share price of $195.02), implying they see 11.8% upside in buying Leidos in the short term.