Why Leidos (LDOS) Is a Strategic Buy for Defense Sector Exposure in 2025

The defense sector has long been a haven for investors seeking stability amid economic uncertainty, and 2025 is no exception. With geopolitical tensions persisting and U.S. defense budgets expanding, companies like Leidos Holdings (LDOS) are uniquely positioned to capitalize on sustained demand for advanced technology and mission-critical services. For investors looking to gain exposure to this resilient industry, Leidos offers a compelling case: a robust contract backlog, superior profitability metrics, and a disciplined approach to shareholder returns. Let's break down why LDOS is a strategic buy.

1. A Fortress of Backlog: Fueling Long-Term Revenue Visibility

Leidos' recent financial disclosures paint a picture of a company with exceptional long-term visibility. As of Q1 FY2025, its total contract backlog surged to $46.3 billion, up 13% year-over-year, driven by a new accounting policy that now includes estimated future revenue from sole-source IDIQ contracts. This backlog is not just large—it's diversified across four segments:
- National Security & Digital: $24.3 billion (44% of total), with a focus on cyber and AI-enabled solutions.
- Health & Civil: $11.3 billion, including a $40 million IDIQ for wildland firefighter medical services.
- Defense Systems: $5.6 billion, anchored by high-margin projects like Project Night Owl.

The company's recent contract wins further underscore its competitive edge. For instance, the $205 million DTRA IT modernization task order and the $148 million Project Night Owl managed services contract highlight Leidos' ability to secure high-value, multi-year deals. These contracts are not just revenue generators—they're strategic assets that lock in market share in critical defense and intelligence markets.

2. Profitability That Outpaces Peers

Leidos' financial performance in Q2 FY2025 was nothing short of stellar. Revenue grew 3% year-over-year to $4.25 billion, while net income jumped 21% to $393 million, translating to a 9.2% net margin—a 160-basis-point improvement from the prior year. Adjusted EBITDA hit a record $647 million, with margins expanding to 15.2%, reflecting disciplined cost management and operational efficiency.

What's particularly impressive is Leidos' ability to convert revenue into free cash flow. The company generated $457 million in free cash flow in Q2, even after spending $29 million on capital expenditures and acquiring Kudu Dynamics for $291 million. This cash flow flexibility is critical for sustaining growth while rewarding shareholders.

3. Shareholder-Friendly Policies: A Win for Long-Term Value

Leidos has consistently prioritized shareholder returns, and its Q2 results reinforce this commitment. The company returned $61 million to investors through dividends and buybacks, including a $0.40 per share dividend declared in August 2025. With a current yield of ~1.8% and a payout ratio of just 30% (based on trailing earnings), the dividend appears both sustainable and undemanding of cash flow.

Moreover, Leidos' balance sheet is a model of prudence. Despite carrying $5.1 billion in debt, the company's $930 million cash balance and $457 million in free cash flow provide ample flexibility to manage obligations while funding strategic acquisitions. The recent $300 million acquisition of a cyber platform developer, for example, aligns with Leidos' NorthStar 2030 strategy to dominate AI-driven defense solutions.

Why This Matters for Investors

The defense sector's resilience is well-documented, but Leidos' execution sets it apart. Its $46.3 billion backlog ensures a steady revenue stream for years, while its 15.2% EBITDA margin and 9.2% net margin outpace many peers in the sector. For investors, this combination of growth and profitability is rare.

Additionally, Leidos' shareholder-friendly policies—including a rising dividend and active buybacks—make it an attractive long-term hold. In a market where many defense contractors trade at premium valuations, Leidos offers a compelling balance of value and growth.

Investment Thesis

• Buy for: Long-term exposure to the defense sector's tailwinds, including AI/cyber growth and U.S. budget increases.
• Hold for: A disciplined balance sheet and consistent free cash flow generation.
• Watch for: Execution on the NorthStar 2030 strategy and integration of new acquisitions.

Conclusion

Leidos is more than a defense contractor—it's a strategic partner in the U.S. government's mission to secure national interests. With a fortress-like backlog, expanding margins, and a shareholder-centric approach, LDOS is a rare combination of stability and growth. For investors seeking to hedge against macroeconomic risks while capitalizing on the defense sector's momentum, Leidos is a no-brainer.

Final Verdict: Buy Leidos (LDOS) for a diversified portfolio with exposure to a high-margin, resilient industry.