Leidos (LDOS): A Strategic Play on Defense Growth and Undervalued Potential

The defense and cybersecurity sector is experiencing a renaissance, driven by geopolitical tensions, rising cyber threats, and sustained U.S. government spending on modernization. Among the beneficiaries is Leidos Holdings, Inc. (LDOS), a $18 billion IT and engineering firm whose strategic focus on high-margin defense programs has positioned it to outperform peers. With a robust $46.3 billion backlog, upward earnings revisions, and a forward P/E ratio trading at a 33% discount to its sector, Leidos offers a compelling mix of valuation upside and durable growth drivers.

Valuation: A Discounted Leader in a High-Growth Sector
Leidos currently trades at a forward P/E of 13.87, significantly below the 20.72 industry average for the Computers - IT Services sector. This valuation gap is striking given the company's strong backlog and recurring revenue streams. A underscores its undervalued status. The stock's 1.14% dividend yield adds further appeal, particularly as the Federal Reserve's rate-hike cycle eases.

The company's backlog—now $46.3 billion, including $7.3 billion in funded contracts—serves as a critical buffer against revenue volatility. Notably, recent wins like the $205 million DTRA contract and the $148 million Air Force Project Night Owl task order reflect demand for Leidos' expertise in classified defense programs. This backlog, which the company now reports under a new IDIQ contract accounting policy, is a three-year revenue runway at current growth rates.

Earnings Momentum: Upward Revisions and a Strong Q1
Leidos' Q1 2025 results demonstrated resilience, with revenue rising 7% year-over-year to $4.25 billion and non-GAAP EPS jumping 30% to $2.97. These results pushed the Zacks Rank to #2 (Buy)—an upgrade from its prior #3 (Hold)—as analysts revised estimates upward. The consensus now forecasts full-year 2025 EPS of $10.70, up 4.8% from 2024, with revenue projected at $17.11 billion.

A would reveal a clear upward trajectory, driven by margin expansion in its Defense Solutions segment. The company's NorthStar 2030 strategy, which prioritizes cyber, space, and AI-driven solutions, is already bearing fruit: the recent $300 million acquisition of a cybersecurity firm will strengthen its position in a market expected to grow at 8% annually.

Industry Positioning: Riding the Golden Dome and Defense Modernization Wave
Leidos is a prime beneficiary of the U.S. Department of Defense's “Golden Dome” initiative, which aims to modernize military networks and counter hybrid threats. The firm's role in classified programs like the Defense Threat Reduction Agency's contract highlights its unique access to high-priority projects. With the Pentagon's IT modernization budget projected to exceed $100 billion over the next decade, Leidos' expertise in legacy system upgrades and cloud migration is a strategic moat against competitors.

Moreover, the Biden administration's $323 billion CHIPS and Science Act, coupled with bipartisan support for defense spending, ensures steady demand. Leidos' cybersecurity and engineering capabilities are directly aligned with these priorities, making it a low-risk play on defense sector tailwinds.

Investment Thesis: Near-Term Catalysts and Long-Term Growth
Investors should take note of two near-term catalysts:
1. Q2 2025 Earnings Release (expected July 2025): Analysts anticipate EPS of $2.58, with upward revisions likely if the cybersecurity acquisition and Golden Dome contracts deliver early wins.

Historically, this strategy has proven rewarding: between 2020 and 2025, buying LDOS on earnings release dates and holding for 20 days generated an average annual return of 16.18%, outperforming the stock's total return of 34.61% over the same period by 21.96%. While the strategy faced a maximum drawdown of 6.42%, its strong excess return underscores the potential upside tied to earnings catalysts.

1. Dividend Payout (June 30, 2025): The $0.40 quarterly dividend reinforces Leidos' status as a stable income generator.

Longer term, the company's focus on recurring revenue (e.g., IDIQ contracts) and its NorthStar 2030 targets—10% revenue growth and 15% operating margins—suggest sustainable outperformance. The stock's $176.46 average price target implies a 25% upside from current levels, while its PEG ratio of 1.8 (below the sector's 2.07) signals value relative to growth expectations.

Risks to Consider
No investment is risk-free. Leidos faces U.S. government budget delays, cybersecurity risks, and execution challenges with its acquisitions. However, its diversified backlog and strong federal relationships mitigate these risks, as does its track record of converting IDIQ contracts into funded work.

Final Take: Buy Leidos for Value and Growth
Leidos is a rare combination of a cheap stock with a clear growth narrative. Its valuation discount, robust backlog, and strategic alignment with defense modernization make it a standout in an otherwise expensive sector. With a Zacks Rank #2 (Buy) and a 12-month price target nearly 25% above current prices, now is the time to position in LDOS.

Action Items:
- Buy LDOS ahead of Q2 earnings if the stock remains below $150.
- Monitor Zacks' EPS revisions and backlog updates for further upside catalysts.
- Consider a long-term hold for dividend income and exposure to defense modernization.

In a sector where valuation discipline is scarce, Leidos offers both safety and growth—a rare blend in today's market.