Leidos trades at $163.50 and has moved in lockstep with the market. Its shares have returned 5.5% over the last six months while the S&P 500 has gained 9.2%.
Is there a buying opportunity in Leidos, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
We don't have much confidence in Leidos. Here are three reasons why there are better opportunities than LDOS and a stock we'd rather own.
Why Is Leidos Not Exciting?
Formed through the split of IT services company SAIC, Leidos (NYSE:LDOS) offers technology and engineering solutions such as military training systems for the defense, civil, and health markets.
1. Weak Backlog Growth Points to Soft Demand
Investors interested in Defense Contractors companies should track backlog in addition to reported revenue. This metric shows the value of outstanding orders that have not yet been executed or delivered, giving visibility into Leidos’s future revenue streams.
Leidos’s backlog came in at $40.56 billion in the latest quarter, and over the last two years, its year-on-year growth averaged 3.5%. This performance was underwhelming and suggests that increasing competition is causing challenges in winning new orders. 
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Leidos’s revenue to rise by 3.2%, a deceleration versus its 7.1% annualized growth for the past two years. This projection is underwhelming and suggests its products and services will face some demand challenges.
3. Free Cash Flow Margin Dropping
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, Leidos’s margin dropped by 3.8 percentage points over the last five years. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. If the longer-term trend returns, it could signal higher capital intensity. Leidos’s free cash flow margin for the trailing 12 months was 7.7%.
Final Judgment
Leidos isn’t a terrible business, but it isn’t one of our picks. That said, the stock currently trades at 17.7× forward price-to-earnings (or $163.50 per share). Investors with a higher risk tolerance might like the company, but we don’t really see a big opportunity at the moment. We're pretty confident there are superior stocks to buy right now. We’d suggest looking at one of our top software and edge computing picks.
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