Leidos is a high-quality business trading at a discount.
Leidos Holdings, Inc. (LDOS), a leading player in defense, intelligence, and IT services, has been quietly delivering value to shareholders while navigating the complexities of government contracts and technological innovation. With its stock price at $148.45 as of June 20, 2025, investors may wonder if this company represents a compelling opportunity. Using the Buffett and McGrew valuation methods, we’ve analyzed LDOS to determine its intrinsic value and whether it’s a buy at current levels. Spoiler alert: the numbers suggest it’s a screaming deal. Let’s break it down.
Why Leidos Holdings?
Leidos operates in a niche yet critical sector, providing solutions in cybersecurity, data analytics, and mission-critical IT for clients like the U.S. Department of Defense and NASA. Its acquisition of Lockheed Martin’s IS&GS business in 2016 and Dynetics in 2020 bolstered its capabilities, positioning it as a go-to contractor for high-stakes projects. Despite economic uncertainties, LDOS has shown resilience, with a trailing twelve-month (TTM) net income of $1.33 billion and free cash flow (FCF) of $1.18 billion as of March 31, 2025. But is the market pricing this stability and growth correctly?
Valuation Approach: Buffett and McGrew Methods
To assess LDOS, we applied two robust discounted cash flow (DCF) models: the Buffett Valuation Method, inspired by Warren Buffett’s focus on predictable cash flows, and the McGrew Valuation Method, which adjusts growth assumptions for dynamic businesses. Both methods rely on FCF, shares outstanding (128.7 million as of Q1 2025), and a conservative 8% discount rate (4% Treasury yield plus 4% premium). We used five years of FCF data (2020–2024) to estimate growth, prioritizing data from Leidos’ financial statements.
Step 1: Free Cash Flow and Growth
LDOS’s FCF over the past five years shows steady, if not spectacular, growth:
- 2020: $1.15 billion
- 2021: $816 million
- 2022: $843 million
- 2023: $958 million
- 2024: $1.18 billion (TTM)
The 5-year FCF compound annual growth rate (CAGR) is a modest 0.69%, reflecting some volatility (e.g., a dip in 2021). Since this is below 10%, both valuation methods classify LDOS as a stable stock, applying a 5% growth rate for years 1–10 and a 2.5% perpetual growth rate thereafter. This conservative approach aligns with LDOS’s steady government contract revenue, which lacks the explosive growth of tech giants but offers reliability.
Step 2: Buffett Valuation
The Buffett method projects FCF for 10 years at 5% growth, starting with 2024’s $1.18 billion. By year 10, FCF reaches $1.93 billion. The terminal value, calculated as Year 10 FCF × (1 + 2.5%) ÷ (8% – 2.5%), is approximately $35.91 billion. Discounting all cash flows back to today at 8% yields a total present value of $28.03 billion. Dividing by 128.7 million shares gives an intrinsic value per share of $217.75. Applying a 25% margin of safety, the target price is $163.31.
Step 3: McGrew Valuation
For stocks with low growth (CAGR ≤ 10%), the McGrew method mirrors the Buffett approach, using the same 5% growth rate and 2.5% perpetual growth. Thus, the intrinsic value per share is identical: $217.75, with a margin-of-safety price of $163.31. For growth stocks, McGrew would taper growth rates, but LDOS’s stable profile simplifies the calculation.
Step 4: Valuation Status
With LDOS trading at $148.45, we compare it to the intrinsic value ($217.75):
- Screaming Buy: Price ≤ $163.31 (75% of intrinsic value)
- Buy: $163.31 < Price ≤ $202.51 (93% of intrinsic value)
- Hold: $204.69 (94%) < Price ≤ $293.96 (135% of intrinsic value)
- Overvalued: Price > $296.14 (136% of intrinsic value)
Since $148.45 is below $163.31, LDOS qualifies as a Screaming Buy, suggesting significant upside potential.
Valuation Table
| Stock Ticker | Valuation Method | Intrinsic Value per Share | Price with 25% Margin of Safety | Last Closing Price | Valuation Status |
|---|---|---|---|---|---|
| LDOS | Buffett Valuation | $217.75 | $163.31 | $148.45 | Screaming Buy |
| LDOS | McGrew Valuation | $217.75 | $163.31 | $148.45 | Screaming Buy |
Financial Health: ROE and RoNTE
Beyond valuation, LDOS’s profitability metrics reinforce its attractiveness. The TTM Return on Equity (ROE) is 28.98%, calculated as $1.33 billion net income divided by average shareholders’ equity of $4.60 billion. This high ROE reflects efficient use of equity capital, competitive in the defense sector. However, the Return on Net Tangible Equity (RoNTE) is -59.03% due to negative tangible equity (-$2.26 billion average), driven by $6.59 billion in goodwill and intangibles. Negative RoNTE is common in acquisition-heavy firms and less concerning given LDOS’s strong cash flows and ROE.
Risks and Considerations
While LDOS appears undervalued, investors should note:
- FCF Volatility: The low 0.69% CAGR stems from inconsistent FCF, with negative quarters (e.g., Q1 2023: -$137M). This may undervalue growth potential.
- Debt Levels: A debt-to-equity ratio of ~1.3 (Q1 2025) increases financial leverage, amplifying ROE but adding risk if contracts falter.
- Government Dependency: LDOS relies heavily on U.S. government contracts, exposing it to budget cuts or policy shifts.
- Data Limitations: Our analysis used TTM data for 2024 due to incomplete 2025 figures, and we couldn’t access real-time analyst projections for growth.
Why LDOS Is a Screaming Buy
At $148.45, LDOS trades 32% below its intrinsic value of $217.75, offering a rare margin of safety in a market where undervaluation is scarce. Its robust ROE, consistent FCF generation, and strategic position in a defensive industry make it a compelling pick for value investors. The stock’s P/E ratio (TTM: 14.97) and P/S ratio (1.18) further suggest it’s priced attractively relative to earnings and revenue.
Leidos Holdings stands out as a high-quality business trading at a discount. Whether you’re a Buffett-style investor seeking predictable cash flows or a McGrew enthusiast looking for nuanced growth assumptions, LDOS delivers. Its screaming buy status at $148.45 signals potential for 46% upside to its intrinsic value. For those willing to stomach government contract risks and modest growth, LDOS could be a cornerstone holding in a diversified portfolio.
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