In the high-stakes world of defense contracting, few names carry as much weight as Leidos Holdings (NYSE: LDOS). The Virginia-based technology leader has built a formidable business providing mission-critical solutions to government agencies and commercial customers.
From cybersecurity and artificial intelligence to healthcare services and logistics support, Leidos touches nearly every aspect of national security and civilian infrastructure.
The stock has been on quite a roller coaster ride lately.
After surging to a peak of over $200 in late 2024 amid heightened global security concerns, shares took a sharp tumble below $150 by year-end. But aside from a sell-off yesterday (which was caused by industrywide factors rather than anything company-specific), the stock appears to have found its footing again.
The company’s latest results are certainly worth noting. It just posted a stellar third quarter, with revenues jumping 7% year over year to $4.19 billion. Even more impressive was its adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) margin of 14.2% – a new record that showcases the company’s improving operational efficiency.
Leidos also generated robust free cash flow of $633 million and secured $8.1 billion in new bookings, bringing its total backlog to a whopping $40.6 billion.
Management’s recent actions suggest strong confidence in the business too. They’ve hiked the quarterly dividend by 5.3% and, through three quarters, had already completed $450 million of their planned $500 million share repurchase program for the year.
The company also announced two major contracts earlier this week: a $120 million cybersecurity deal with the Department of Defense and a $2.6 billion contract to maintain Transportation Security Equipment at over 430 U.S. airports.
So, while investors may be concerned about the defense sector as a whole… the company itself is thriving.
This is a great example of how The Value Meter can help keep us grounded amid a flurry of news.
In terms of valuation, Leidos currently trades at an enterprise value-to-net asset value (EV/NAV) ratio of 5.39, which is actually about 26% below the average of 7.33 for companies with positive net assets. At first glance, that might make the stock look like a bargain.
However, its cash-generating power tells a different story. The company’s free cash flow has averaged 7.04% of its net assets over the past four quarters – a bit below the peer average of 7.9%.
In other words, while Leidos trades at a discount to its peers, its slightly weaker cash generation largely justifies the cheaper price tag. The company’s stock isn’t expensive by any means, but it also isn’t screaming “Buy me!” at current levels.
For investors seeking exposure to the defense and government services sector, Leidos offers a fair entry point with its proven execution capabilities and sizable backlog. Just don’t expect a massive bargain at these prices.
The Value Meter rates Leidos as “Appropriately Valued.”
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