LDOS Leidos
Clearance-moated defense IT compounder; price caught up but cash flows still underpriced.
The story
Leidos is a clearance-moated defense IT and services compounder benefiting from rising DoD budgets and AI/IT modernization priorities. Margins have recovered sharply from a 4% trough to ~11-12%, approaching mature sustainable levels. The business is in late-stage growth with durable contract backlogs but faces competitive pressure in emerging defense-AI segments.
Drivers unchanged from prior take: revenue growth at 6% aligns with the ~6% 5-year CAGR and defense budget trends; 12.5% target margin is nearly reached (TTM 11.4%, recent quarter 12.3%), leaving modest expansion over 5 years. Sales-to-capital of 1.8 matches the actual 1.84, and beta of 1.1 is appropriate for a defense contractor with modest cyclicality. Horizon of 10 years reflects the clearance moat and sticky government contracts—above ordinary but below a true franchise.
Value drivers
| Revenue growth (Y1) | 6.0% |
| Terminal growth | 2.5% |
| Forecast horizon | 10y |
| Target operating margin | 12.5% |
| Years to target margin | 5 |
| Sales-to-capital | 1.80 |
| Beta | 1.10 |
| Failure probability | 1.0% |
| Cost of capital (WACC) | 8.7% |
| Terminal WACC | 8.3% |
Valuation bridge
| PV of explicit FCFF | 10.30B |
| PV of terminal value | 16.29B |
| Equity value | 22.77B |
| ÷ shares → per share | $181.01 |
News
bullish +0.20 · 8 articles
- If You Invested $1000 in Leidos a Decade Ago, This is How Much It'd Be Worth Now
- 2 Mid-Cap Stocks to Keep an Eye On and 1 We Turn Down
- The 5 Most Interesting Analyst Questions From Leidos’s Q2 Earnings Call
- CoreWeave (CRWV) Enters Defense AI While Opening Three Indonesia Data Centers
- Can Maximus Weather the VA Contract Hit and Rebuild Earnings Momentum?
- CoreWeave’s Forecast Is Key to Stopping Another Earnings Selloff
- Should Investors Buy ICFI as Growth Improves While Key Risks Persist?
- Leidos Portfolio Diversification Seen Underappreciated, RBC Says
Projected free cash flow to the firm
| Yr | Revenue | Growth | Margin | NOPAT | Reinvest | FCFF | PV |
|---|---|---|---|---|---|---|---|
| 1 | 18.69B | 6.0% | 11.6% | 1.67B | 587.80M | 1.08B | 993.40M |
| 2 | 19.74B | 5.6% | 11.9% | 1.79B | 582.68M | 1.21B | 1.03B |
| 3 | 20.77B | 5.2% | 12.1% | 1.92B | 572.73M | 1.35B | 1.05B |
| 4 | 21.78B | 4.8% | 12.3% | 2.05B | 557.76M | 1.49B | 1.07B |
| 5 | 22.74B | 4.4% | 12.5% | 2.18B | 537.67M | 1.64B | 1.08B |
| 6 | 23.67B | 4.1% | 12.5% | 2.27B | 512.43M | 1.75B | 1.07B |
| 7 | 24.53B | 3.7% | 12.5% | 2.35B | 482.08M | 1.87B | 1.04B |
| 8 | 25.34B | 3.3% | 12.5% | 2.43B | 446.76M | 1.98B | 1.02B |
| 9 | 26.07B | 2.9% | 12.5% | 2.50B | 406.66M | 2.09B | 989.94M |
| 10 | 26.72B | 2.5% | 12.5% | 2.56B | 362.08M | 2.20B | 957.77M |
Key risks
- DoD budget cuts or continuing resolution delays compress revenue growth
- Competitive entrants (e.g., CoreWeave, Palantir) erode defense-AI contract share
- Margin expansion stalls as contract mix shifts toward fixed-price work
Catalysts
- Large multi-year contract awards extending revenue visibility
- Defense AI modernization accelerates funding toward IT services primes