Leidos Holdings (LDOS) – Interesting defense name worth adding

Ray Dalio posted several articles on how world order changed and international superpowers such as China, USA, Russia are no longer bound by diplomatic rules. This typically leads to an accelerated path to physical war.

On top of this, the defense sector has been beaten down to the death. LMT, LDOS all at multi year low mults. We can already see what happened with Iran this year. The world is unpredictable and changing rapidly. Wars at small scale are already breaking out every 2 years or less. And the US will increase defense spending. This will have compounding growth effects on the IT side of defense. And I think LDOS will capitalize on this as it has solid fundamentals and cheap valuations.

For LDOS specifically. It has solid balance sheet (great solvency ratios, shrinking net debt, stable working capital levels, stable fixed asset that supports growth), good income statement profitability (MSD topline growth/LDD net income growth), expanding margins, and strong FCF.

For visualization – It’s a business earning 17 billion sales and keeping 1.8 billion as free cash flow – and all this is trading at 16 billion market cap. So it’s trading around 11 x earnings and roughly the same multiple for FCF. This multiple certainly looks like value to me. And it’s an 8.5% FCF yield – this is almost twice the risk free rate on 10 year treasury yield! This is literally a buffet type of business.

Another value green flag is capital allocation. They return 40-50% of free cashflow to shareholders in the form of dividend (25%) and buybacks (75%). And they’ve been pretty stable with this in the last 5 years (amount returned to shareholders grew from 900mil to 1.6billion in 2025).

And they are down for a reason I like – they tripled their capex for 2026 to expand their business on a 2030 initiative that burns cash upfront. That being said, their core business remains a cash cow with a backlog of 48 billion. This is exactly when you buy: the sector is beaten down, company prices in fcf slowdown due to capex, management decides to drive long term growth by sacrificing near term stock price, and the cash cow continues to return profit to shareholders.

Overall I rate this business as amazing! But who knows how long the recovery will come. As this stock doesn’t offer leaps, I’ll be buying stocks like crazy instead of options!