Leidos: A High-Conviction Buy as Defense Tech and AI Cyber Demand Surge

In an era where national security and artificial intelligence (AI) are reshaping global defense strategies, Leidos Holdings (LDOS) stands out as a rare combination of strategic foresight and operational excellence. With a robust pipeline of high-margin contracts, disciplined capital allocation, and a clear alignment with government priorities, Leidos is not just keeping pace with the surge in defense tech and AI cyber demand—it is leading the charge. For investors seeking long-term value in a sector poised for sustained growth, Leidos offers a compelling case for high-conviction investment.

Strategic Positioning: AI-Enabled National Security as a Growth Engine

Leidos' NorthStar 2030 strategy is anchored in five pillars: Space and Maritime, Energy Infrastructure, Digital Modernization and Cyber, Mission Software, and Managed Health Services. Among these, the Digital Modernization and Cyber segment has emerged as a standout, driven by the urgent need for AI-powered solutions to combat evolving cyber threats.

Recent contract wins underscore this focus. In Q2 2025, Leidos secured a $1.3 billion Intelligence Community contract and a $390 million recompete, both spanning a decade. These awards reflect the company's ability to deliver mission-critical systems, such as AI-driven threat detection and secure data analytics, which are now central to national security. Additionally, a $350 million Air Force Electronic Warfare Mission Support subcontract and an $87 million NATO IT Modernization contract highlight Leidos' global reach and technical expertise.

The acquisition of Kudu Dynamics in May 2025 further solidifies its position. This cyber platform developer added $149 million to Leidos' backlog and enhanced its AI-enabled capabilities in real-time threat response. Such strategic moves align with the U.S. government's push for resilient digital infrastructure, a trend that is unlikely to wane in the face of geopolitical tensions and AI-driven cyberattacks.

Financial Performance: Outperforming Peers Through Backlog Growth and Margin Expansion

Leidos' financials tell a story of disciplined execution and margin resilience. In Q2 2025, the company reported $4.25 billion in revenue, a 3% year-over-year increase, with adjusted EBITDA margins rising to 15.2% from 13.5% in the prior year. This margin expansion is a testament to its operational efficiency, particularly in the National Security & Digital segment, which posted a 10.0% operating margin, and the Health & Civil segment, which maintained a high margin of 24.4%.

The $46.2 billion total backlog as of Q2 2025—up from prior years—provides a clear runway for future revenue. With $7.1 billion of that backlog funded, Leidos has demonstrated its ability to convert long-term contracts into near-term cash flow. This is critical in a sector where project timelines can stretch for years.

Capital Allocation: Shareholder Returns and Prudent Debt Management

Leidos' capital allocation strategy is a masterclass in balance. In Q1 2025, the company executed a $500 million accelerated share repurchase, signaling confidence in its undervalued stock. This complements a dividend yield of 1.01%, with a conservative payout ratio of 15.6%, ensuring sustainability even in economic downturns.

Debt management is equally disciplined. Leidos refinanced $500 million in maturing debt in May 2025, locking in fixed rates of 5.40% and 5.50% for 2032 and 2035, respectively. This extended maturity profile reduces refinancing risk and aligns with its long-term contract base. The company's debt-to-equity ratio of 1.35 and interest coverage ratio of 10x highlight its financial flexibility, outperforming peers like CACI and SAIC, which often carry higher leverage.

Valuation: A Compelling Buy at a Discount to Earnings

Despite its strong performance, Leidos trades at a P/E ratio of 16.19, below its historical median, and a P/S ratio of 1.26, indicating a reasonable valuation relative to revenue. Its free cash flow yield of 5.71% and ROE of 31.31% further underscore its value proposition.

The company's PEG ratio, though not explicitly stated, is implied to be attractive given its earnings growth and low valuation. Analysts project $11.15 to $11.45 in non-GAAP diluted EPS for 2025, a 10% increase from prior guidance, while revenue is expected to hit $17.00–$17.25 billion. These metrics position Leidos as a high-margin, high-barrier business with a strong moat in government contracting.

Investment Thesis: A High-Conviction Buy

Leidos' combination of strategic AI-enabled national security contracts, disciplined capital allocation, and attractive valuation makes it a standout in the defense sector. Its backlog growth, margin expansion, and proactive debt management provide a buffer against macroeconomic risks, while its alignment with government priorities ensures long-term visibility.

For investors, the key risks include budget delays and rising interest rates, but Leidos' conservative leverage and cash flow generation mitigate these concerns. With a $43.6 billion backlog and a $20.7 billion market cap, the company is well-positioned to outperform peers as defense and AI spending accelerate.

Conclusion: Leidos is not just a beneficiary of the current defense and AI boom—it is a driver of it. For those seeking a high-conviction buy in a sector with structural tailwinds, Leidos offers a rare blend of growth, profitability, and shareholder-friendly policies. The time to act is now, before the market fully recognizes its potential.