Leidos Holdings, Inc. (LDOS) stock intrinsic value fair value estimate & owner earnings analysis

Leidos is one of the largest technology, engineering and health-services contractors to the U.S. government. Since 2026 it reports four segments. In the first half of 2026 revenue was $8.96 billion: Intelligence & Digital $3.01 billion, Health $2.27 billion, Homeland $1.83 billion and Defense $1.84 billion. Backlog at July 3, 2026 was $48.7 billion, of which $10.2 billion was funded. In March 2026 Leidos paid $2.4 billion in cash for ENTRUST Solutions Group, a power-grid engineering firm, and on October 5, 2026 it contributed its airport and security-screening business to a joint venture with Analogic, keeping a minority stake. The most important fact about Leidos's earnings is where its profit comes from. The Health segment earned a little under 30% of company revenue but more than half of operating income in 2025: $1.20 billion of operating income at a 23.7% margin, against $2.11 billion for the whole company. The largest piece of Health is medical disability examinations for the Department of Veterans Affairs, run through the QTC subsidiary, which has served the VA since 1998. Management described this program in September 2026 as more than $1 billion of annual revenue, about 40% of the VA's contracted exam volume of roughly 2.8 million exams a year, and its most profitable program. In its 2025 10-K the company attributed part of 2025's Health profit growth to a net increase in favorable contract adjustments in this business. That program is now changing in three ways. First, the VA added a fourth vendor to the regional exam contracts, and Health revenue fell 8% in the second quarter of 2026 to $1.09 billion on lower exam volumes, with the segment margin falling to 23.4% from 25.8%. Second, the VA suspended performance incentive payments to all exam vendors from July through December 2026 while it reviews how those payments were administered; the Government Accountability Office had earlier found the VA overpaid about $2.3 million in incentives in fiscal 2024, which the VA said it recovered. Management also said it reduced pricing on some of these contracts and expects Health margins of about 20% in the second half of 2026. Third, the whole program is being recompeted. The current regional contract runs through December 31, 2026, and management expects an extension into early 2027. The VA released a draft request for proposals for the replacement, called Medical Disability Examinations-Next Generation, in October 2026. The draft groups the work, including pre-discharge exams, into six service groups, and management has said the VA may award it to fewer vendors than today, possibly two or three. Leidos is one of only two vendors operating in all six current regions. How we measured earnings. We start with operating cash flow and remove working-capital swings, stock compensation and the capital spending needed to keep the business running, which is about 1% of revenue. On that basis owner earnings were about $5 to $7 per share from 2017 through 2023, $10.01 in 2024 and $15.50 in 2025. The 2025 figure includes a one-time tax benefit of about $331 million from the 2025 tax law's reversal of research-cost capitalization, which we spread back to the years it belongs to. We add back amortization of acquired intangibles as a sunk acquisition cost and carry the decay of acquired contracts in the cases instead. We value the business before its lenders are paid and then subtract what it owes. Before interest, normal earning power in 2024 and 2025 averaged about $1.79 billion. That level no longer describes the business, because it included Health profits at margins and volumes that the VA has since reduced. We cross-checked two ways. Starting from 2024 and 2025, adding about $70 million a year for ENTRUST, removing about $32 million for the security-screening business, and removing the after-tax effect of Health margins falling to the roughly 20% now in place gives about $1.64 billion. Starting from first-half 2026 results annualized, adding back part of the one-time acquisition, restructuring and pension costs, and lowering Health for the second-half margin gives about $1.72 billion. We use $1.68 billion, or about $13.33 per share on 126 million diluted shares. We estimate that about $350 million of this comes from the VA exam program, about $330 million from the rest of Health, and about $1.0 billion from everything else. Growth check. Cash earnings before interest grew about 14% in 2025. Our starting level is already lower than 2025 because of the Health changes, and the base case then adds growth only outside the VA exam program. What Leidos owes. Debt was about $6.03 billion on the balance sheet at July 3, 2026 (about $6.08 billion at face value): a $500 million term loan due March 2028 and bonds maturing from 2029 to 2040, plus small finance leases. Cash was $748 million, of which we treat about $400 million as more than the business needs. Outside owners of partly owned subsidiaries hold $52 million. Much of the debt is fixed below 6%, most notably $1 billion at 2.30% until February 2031, and we estimate that cheap borrowing is worth about $0.29 billion to shareholders. Net, debt comes to about $5.44 billion, or $43.19 per share. Cash interest was $220 million in 2025 and $112 million in the first half of 2026. The nearest large maturities are $500 million in 2028, $600 million in 2029, $750 million in 2030 and $1 billion in 2031. Base case ($213.77 per share). Leidos keeps a large position in the new VA exam contract, as the longest-serving vendor and one of two covering every region, but the program's profit falls a further 15%, to about $298 million a year from 2027, because every recent change in the program, the added vendor, the price reductions and the paused incentives, has moved terms against the vendors. The rest of Health is held flat. Everything else grows 3.5% a year for ten years, supported by $48.7 billion of backlog, a funded backlog up sharply over the past year, and the price escalation built into government contracts; that is below the roughly 6% revenue growth of 2021 to 2025, which included acquisitions. We do not credit management's targets, new program wins such as the FAA's Common Automation Platform or the Navy's unmanned surface vessel competition, or any return of VA incentive payments, because none of those is secured. After year ten earnings are held flat on Leidos's long record of re-winning government work. Cash before interest runs from about $1.66 billion in 2027 to $2.04 billion in 2036. The business is worth about $32.4 billion; less $5.44 billion of debt, shareholders' value is about $26.9 billion. Bear case ($100.71). Leidos loses most of the VA exam work in the recompete as the VA consolidates to fewer vendors: the program's profit falls to about $210 million in 2027 and to about $88 million a year from 2028, a quarter of today's level. ENTRUST earns about $20 million a year less than we assume. On top of that comes a federal spending squeeze of the kind Leidos went through in fiscal 2014, when sequestration and the October 2013 government shutdown cut its revenue 11%, from $6.47 billion to $5.77 billion, and operating income fell from $423 million to $164 million. We model the rest of the business's cash earnings falling 15% in 2028 and another 5% in 2029, then recovering at 2% a year; after year ten earnings shrink 2% a year as programs end. Cash before interest falls from about $1.52 billion in 2027 to a low of about $1.15 billion in 2029, still about four times the interest bill. This case also stands in for the U.S. Department of Justice Antitrust Division investigation into three 2021 and 2022 Intelligence procurements, which the company disclosed and for which it cannot estimate any penalty. The business is worth about $18.1 billion; less $5.44 billion of debt, about $12.7 billion. Bull case ($253.54). Leidos wins an enlarged share of the consolidated VA program and incentives return in the new contract, lifting the program's profit about 10% above today's level to about $385 million a year. The rest of Health grows 1% a year, ENTRUST earns about $85 million, and everything else grows 5% a year for ten years, still below the recent revenue record, then holds flat. The business is worth about $37.4 billion; less $5.44 billion of debt, about $31.9 billion. What changed since our last look. Our previous analysis treated the VA exam business mainly as a question of whether 2025's Health margins would last, and its weakest case cut Health profit only modestly. The Health changes are larger and more structural than that: a fourth vendor has taken volume, prices on some contracts were reduced, incentives are suspended, and the program is being rebid, possibly to fewer vendors. Our starting earnings level is lower, our base case now assumes further pressure on the program in the recompete, and our bear case now includes losing most of it. The base value falls from $269.37 to $213.77, the bear value from $123.69 to $100.71 and the bull value from $339.71 to $253.54. The margin-of-safety price. We are reasonably confident of the earnings level outside Health, which rests on audited cash flow, a large backlog and a broad set of agencies. We are much less confident about the VA exam program, which is a large share of profit and whose terms are being reset by a single customer within the next year. The worst plausible outcome is losing most of that program at the same time as a federal spending downturn like 2013 and 2014; the bear case models that, and Leidos's structure survives it because its debt is moderate, its maturities are spread out and its cash comfortably covers interest even at the trough. What we are most likely to be wrong about is the outcome of the VA recompete, the depth of the next federal spending squeeze, and whether ENTRUST earns its price. The price assumes a three-to-five-year holding period, with the business paying a dividend of about $1.74 a share a year and generating roughly $11 a share a year beyond that to repay debt or repurchase shares. From $100, if the shares came to reflect the base case at the end of five years, including that retained cash and dividends, the base case implies roughly 21% a year; the bear case implies a low single-digit annual return rather than a loss. The margin-of-safety price is $100.00, because at that level the 20% target is met on the base case while the outcome of the VA recompete, the largest single unknown, is still open, and the bear case still recovers the starting price.