Leidos: a big backlog, and fresh leverage

Leidos sells technology, engineering and systems-integration services to U.S. defense, intelligence, health, homeland and civil agencies, plus a growing commercial infrastructure business after the Entrust acquisition. It's a large, mission-critical, security-cleared contractor with a $48.7 billion backlog, which sounds like exactly the kind of steady compounder that shouldn't trade at a discount. At $123.61 it mostly doesn't, but leverage and integration risk keep this a watchlist name rather than a buy today.

At $123.61 on September 25, 2026, the shares trade 20.3% below my triangulated Base value of $155, an upside of 25.4%. The Bear value of $112 is 9.4% below the price. The framework's required margin of safety for this profile is 25%, which puts the maximum buy price at $116.25. Leidos is close to attractive, about 6.3% above that ceiling, but the recent Entrust acquisition has raised net debt enough that this stays a watchlist rather than a buy.

Route: SF-13 Industrial and Manufacturing, government-services and defense-technology subtype. Economic classification: Quality growth contractor (9/12 on the sector scorecard). Primary method: normalized EV/EBITDA less net debt. Secondary method: price to normalized free cash flow. Values are present fair-value estimates, not 12-month price targets.

What Leidos is

Leidos is a diversified U.S. government-services and defense-technology contractor across intelligence, defense, health, homeland security and, since the March 2026 close of the $2.388 billion Entrust acquisition, utility engineering and grid modernization too. Mission criticality and security-clearance requirements create real switching costs, but the business is also exposed to federal budget timing, contract recompetes and fixed-price program risk. Total backlog is $48.7 billion, up 5% year over year, though only $10.2 billion of that is funded, up a sharp 44%. Q2 book-to-bill was 1.1, a positive but not exceptional signal.

Segment mix by total backlog: Intelligence and Digital $18.4 billion, Defense $13.8 billion, Homeland $9.9 billion, Health $6.6 billion. Entrust shifts the portfolio modestly toward infrastructure, adds $1.652 billion of acquisition goodwill, and raises balance-sheet leverage. Customer concentration remains heavily weighted toward U.S. federal agencies even with the commercial diversification.

The latest quarter

Adjusted EBITDA margin was 13.8%, down from 15.2% a year earlier, though the prior-year period benefited from a one-time $25 million insurance reimbursement. Some of the margin softness is Entrust integration cost, some is a genuine mix shift; both deserve monitoring rather than automatic write-off as noise.

Which numbers matter for a government contractor

For a services-heavy, contract-funded business, normalized adjusted EBITDA is the right primary enterprise-valuation metric, cross-checked against operating cash flow less capex and capitalized software. Adjusted EBITDA excludes acquisition integration, restructuring costs and acquired-intangible amortization, which are real costs, especially after Entrust, and shouldn't be ignored indefinitely just because they're labeled non-recurring.

FY2026 guidance implies revenue of $18.20 to $18.40 billion and an adjusted EBITDA margin around 13%, or roughly $2.37 to $2.39 billion adjusted EBITDA. This analysis uses $2.35 billion normalized EBITDA, slightly below the guidance midpoint to allow for integration friction, and $1.50 billion normalized FCF, above the three-year reported average of $1.30 billion but below the FY2026-implied run rate. Both are a moderate-forward base, not a peak-quarter extrapolation.

Shares, debt and the Entrust effect

Shares outstanding were 125.492 million at July 3, 2026, down modestly from 126.381 million at the start of the fiscal year. FY2025 buybacks totaled $400 million after $850 million in FY2024, a favorable but slowing trend as capital gets diverted toward debt paydown. Net debt of roughly $5.25 billion is materially higher than before the $2.4 billion Entrust deal, even after $300 million of Q2 debt repayment. Debt maturities run 2029 through 2036, and the company reports covenant compliance. No convertible securities or dual-class shares add further dilution.

Primary valuation: normalized EV/EBITDA

The table above is a mechanical enterprise-value calculation. The working primary Base is moderated to $155/share, corresponding to about 10.5x $2.35 billion EBITDA less current net debt, to account for adjustment quality, execution and estimate uncertainty rather than the unadjusted 11x figure.

Secondary valuation: normalized price to free cash flow

Using normalized FCF of $1.50 billion and a justified 13x multiple gives equity value of about $19.5 billion, or roughly $155/share on 125.5 million shares. An 11x to 15x range gives $132 to $179/share. The current price implies about 10.3x normalized FCF, or 11.9x on the lower three-year reported average, meaning this valuation depends partly on FY2026 cash generation improving from that average, not solely on multiple expansion.

Historical cross-check

A fully synchronized five-year EV/EBITDA peer series wasn't available from primary filings. As a rough check, the current 8.8x normalized EBITDA sits below the SF-13 standard defense-contractor range of 15x to 22x, though the top of that range fits defense product companies with proprietary systems better than a services-heavy mixed contractor like Leidos. A conservative historical and peer-context range of 9x to 11x normalized EBITDA implies equity value of roughly $116 to $164/share, treated as an estimated framework range rather than a sourced trading statistic.

Valuation triangulation

Rounded working fair value used throughout this analysis is $155. The primary and FCF methods agree closely, but both lean on FY2026-like cash and EBITDA holding up; if normalized FCF reverts to its three-year mean, the FCF method alone falls toward about $134/share at 13x.

What is the market already pricing in?

Current enterprise value of about $20.76 billion against $2.35 billion normalized EBITDA implies 8.8x. The price is also about 10.0x the FY2026 guided non-GAAP EPS midpoint of $12.35, and the quote feed's trailing P/E is around 11.5x. The market appears to price only modest growth and continued federal contracting, while demanding a discount for debt, margin pressure and delivery risk, and treating some of the adjusted earnings with caution: P/FCF is 10.3x on the normalized figure but 11.9x on the reported three-year average.

Bear, base and bull scenarios

Double-counting control: the Bear case pairs a lower EBITDA level with a lower multiple deliberately, since budget and program stress would plausibly reduce earnings and raise perceived risk together; no separate blanket "government shutdown discount" is layered on top.

The probability-weighted value is $151.25 ($112 × 25% + $155 × 55% + $190 × 20%), below the $155 Base value, reflecting asymmetric execution and federal-budget risk.

Sensitivity: EV/EBITDA

How the buy price is set

A 25% margin of safety is used: strong cash generation and backlog, offset by exposure to federal appropriations, recompetes, fixed-price execution and elevated acquisition debt. Applied to the $155 Base value, that gives a maximum buy price of $116.25. The practical buy zone is $108 to $116, with a more attractive cushion below $110. At $123.61 the shares trade about 6.3% above the ceiling.

Dividend

Leidos paid a $0.43 quarterly dividend in 2026, an annualized run rate of $1.72 and an indicated yield of about 1.39% at the current price. FY2025 cash dividends paid were $211 million; Q2 2026 alone returned $55 million as dividends and $72 million through buybacks. This is primarily a total-return and valuation thesis rather than a high-yield one; dividend coverage appears supported by recurring cash generation, but buyback pace and debt reduction need to be balanced against Entrust integration and ongoing capital needs.

Reasons to own LDOS

• Scale and visibility. $48.7 billion total backlog, $10.2 billion funded, and a positive 1.1 book-to-bill.
• Cash generation. A strong reported free-cash-flow history and strong Q2 cash conversion.
• Growth vectors. Defense technology, cybersecurity, energy infrastructure and managed health all provide separate avenues for expansion.
• Undemanding multiple, if guidance holds. Implied EV/EBITDA near 8.8x and P/FCF near 10x are modest for the sector if FY2026 guidance is delivered.
• Shareholder returns. A modestly declining share count plus dividends and buybacks.

What could go wrong?

• Federal budget risk. Budget delays, shutdowns, spending cuts or procurement shifts may defer or reduce awards and funded backlog.
• Contract execution risk. Recompetes, protests, terminations or fixed-price cost overruns can reduce revenue visibility and margins.
• Unfunded backlog. A large share of the $48.7 billion total backlog is unfunded and may not convert into revenue.
• Integration risk. Entrust raises leverage and goodwill; synergies and utility-market growth may disappoint.
• Adjustment reliance. Adjusted EPS and EBITDA exclude acquisition, restructuring and amortization costs; repeated exclusions can overstate sustainable economics.
• Higher leverage. More debt increases rate sensitivity and reduces room for further buybacks or acquisitions.

Management execution

Management raised FY2026 revenue, EPS and operating cash flow guidance after Q2, following a similar increase after Q1, and repaid $300 million of debt while still returning $127 million to shareholders in the quarter, which supports execution credibility. Against that, GAAP net income fell 9% year over year and net margin declined from 9.2% to 7.8%, with $29 million of Entrust, joint-venture and restructuring costs excluded from the adjusted figures, and prior-year margin benefiting from a one-time insurance recovery. Assessment: generally credible operator with positive guidance execution, but a margin-of-safety deduction is warranted for adjustment reliance and acquisition integration.

Stock Analyza scorecard

Business quality score is 78/100: diversified mission-critical work, durable backlog and cash generation, offset by customer and contract concentration. The valuation score is 76/100: the current EV/EBITDA multiple looks modest against guidance and backlog, but is not without risk.

Confidence score

Primary reporting is current and substantial. Confidence is limited by the mostly-unfunded backlog, non-GAAP adjustments, working-capital cash-flow volatility, recent acquisition leverage, and estimates of long-run margins and multiples.

What I would watch from here

Also watch shareholder returns: disciplined buybacks and a covered dividend are green, distributions funded by debt or weakening cash generation are red. Review after each quarterly filing and after major contract, budget, acquisition or guidance updates, paying particular attention to funded backlog, segment margins and net debt.

The three most important thesis breakers

1. Funded backlog conversion or margins deteriorate on a sustained basis.
2. Net debt stays elevated rather than declining as expected.
3. Entrust integration drags on cash generation instead of adding to it.

Adversarial review

The first draft's arithmetic mostly reconciled: market cap, net debt, enterprise value, both primary methods, the triangulation and the buy price all check out. One number was wrong. The probability-weighted scenario value was stated as $147.25, but the draft's own scenarios and probabilities ($112 × 25% + $155 × 55% + $190 × 20%) actually sum to $151.25. The corrected figure is used throughout this article; it remains below the $155 Base value, so the Watchlist conclusion is unchanged.

The strongest bear counter-thesis: FY2026 adjusted EPS guidance and Q2 free-cash conversion may not represent recurring economics, funded backlog is only about a fifth of total backlog, and acquisition leverage could stay high while margins normalize lower. If normalized EBITDA comes in at $2.20 billion and the market values it at 8.5x, equity value falls toward roughly $107/share, below even the stated Bear midpoint, which shows real downside risk remains.

The strongest bull counter-thesis: defense and cyber demand, grid modernization, contract wins and large incumbent positions support continued backlog growth, Entrust diversifies the portfolio, and cash conversion plus buybacks lower debt and share count over time. At $2.5 billion EBITDA and 12x EV/EBITDA, equity value approaches roughly $198/share.

Audit flags: normalized EBITDA and FCF are estimates, not formal company guidance, and the guidance itself is adjusted, non-GAAP. A precise historical multiple series and synchronized peer set weren't available from primary sources, and backlog includes unfunded options and task orders. Fair value changes materially with the multiple and cash-flow assumptions used. The publication gate status is PASS WITH WARNING.

Final verdict: hold at $123.61, watchlist for new money below $116

Leidos combines a large backlog, strong cash generation and a modest implied multiple, but current valuation sits just above the preferred entry level and the recent Entrust acquisition has raised leverage. The main thesis breaker is sustained backlog-conversion or margin deterioration alongside debt that stays elevated.

Verdict: WATCHLIST at $123.61. Triangulated Base value $155, upside 25.4%, Confidence C (17/25). Required margin of safety 25%, maximum buy price $116.25.

A close below roughly $116 with guidance intact would meaningfully improve the risk and reward here.

Sources

Primary sources include Leidos's Q2 FY2026 earnings release, its Q2 FY2026 Form 10-Q, and its FY2025 Form 10-K. Market price comes from market-data reporting as of the reference date.

The reference market price is $123.61, the September 25, 2026 close. Balance sheet figures are as of July 3, 2026, the end of Q2 FY2026. Forward EBITDA and free cash flow are estimates.