Leidos Upgraded to Buy at Jefferies on Defense Growth and Earnings Upside

Leidos Holdings was upgraded to Buy from Hold by Jefferies due to defense growth, earnings upside, and a healthy dose of earnings power. Analysts cited defense tailwinds, improving margin structure, and re-rating potential as reasons for the upgrade.

Jefferies has upgraded Leidos Holdings (LDOS) to Buy from Hold, with a price target of $205, citing significant growth potential in the defense sector and improvements in the company's margin structure. The brokerage raised its price target from $185, highlighting the re-rating potential closer to historical valuation levels.

Leidos' exposure to U.S. government priorities, including the Federal Aviation Administration (FAA), border surveillance, and defense modernization, is seen as a tailwind for roughly half of its revenue. Recent wins, such as a multi-billion-dollar classified program secured in July, further bolster confidence in the company's second-half setup. Additionally, Leidos is expected to benefit from artificial intelligence-driven efficiencies, with the firm estimating $30 million in cost savings in 2025 from reduced labor hours.

The brokerage also highlighted the role of higher VA incentive fees and cost-out initiatives in supporting the company's updated full-year margin guidance in the mid-13% range, up from 12.9% in 2024. Leidos raised its EPS guidance by 7%, though the implied second-half revenue growth slowed to ~1% from 5% in the first half. Jefferies called the guidance conservative, with a backlog-to-book ratio of 1.3x and upside from programs like DISA DES and IFPC Increment 2.

Looking ahead, Jefferies expects organic growth to re-accelerate to 5% in 2026, driven by the U.S. Reconciliation Bill, which earmarks $13 billion in addressable funding across areas where Leidos is well positioned. EPS is forecast at $11.85 for 2026, ahead of the Street.

Jefferies estimates each 10-basis-point margin increase adds about $0.15 to EPS, reinforcing the upside if AI-driven efficiencies continue. The firm sees Leidos as well-positioned to benefit from the growing defense tech market and the potential for further margin improvements.

References:
[1] https://finance.yahoo.com/news/snap-downgraded-leidos-upgraded-wall-133640590.html
[2] https://www.investing.com/news/stock-market-news/jefferies-upgrades-leidos-to-buy-says-margin-risks-easing-4173624