Classified Advantage
In this edition of the Smart Investor newsletter, we take a closer look at the stock of the largest U.S. government IT contractor. We are not making any sales today, as markets continue to digest recent trade agreement developments, with investors rotating into growth names and stepping away from those perceived as more defensive. That said, we have placed several holdings under review and will revisit them once there is greater clarity. But first, let’s dive into the latest portfolio news and updates.
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Portfolio Updates
❖ LPL Financial (LPLA) kicked off 2025 with standout Q1 results, highlighting resilient business momentum, robust asset growth, and disciplined expense management. The firm reported record adjusted EPS of $5.15, up 22% year-over-year, while GAAP EPS of $4.24 reflected acquisition-related costs. Total revenue climbed 30% year-over-year to $3.67 billion, driven by widespread strength across advisory, commission, and asset-based revenue streams. Gross profit rose 19% to $1.27 billion, while adjusted pre-tax income grew 23% to $509 million.
Client cash revenue increased 3% sequentially to $408 million, while service and fee revenue rose 4% to $145 million, aided by IRA fee growth. Transaction revenue was up 10% from the prior quarter thanks to higher trading volumes.
LPL registered industry-leading asset growth rates, with total advisory and brokerage assets reaching a new high of $1.8 trillion, up 25% from a year ago. The company posted record organic net new assets (NNA) of $71 billion, a 16% annualized growth rate. Even excluding institutional onboardings, LPLA reported a healthy 7% organic growth rate. The recruiting engine remained strong with $39 billion in recruited assets during Q1, including $16 billion from Wintrust. The trailing twelve-month recruited asset total hit a record $167 billion.
Looking ahead, LPL reaffirmed its commitment to disciplined capital allocation, including targeted investments in growth and technology, while maintaining flexibility to reduce leverage and resume share repurchases post-acquisition. The company expects Q2 2025 revenue to grow modestly, with service and fee revenue increasing by ~$5 million and transaction revenue holding flat. The adjusted EPS guidance was not explicitly issued, but Q1’s record $5.15 provides a strong baseline amid stable ICA yields and ongoing operating leverage.
Following the blockbuster quarterly results and solid guidance, several top Wall Street firms – including TD Cowen, J.P. Morgan, and Wells Fargo – raised their price targets on the stock, giving LPLA a “Strong Buy” consensus rating.
❖ McKesson (MCK) wrapped up fiscal 2025 with a powerful performance, reporting fiscal fourth-quarter results that exceeded expectations and set a confident tone for the year ahead. Adjusted EPS came in at $10.12, a sharp 64% increase from the prior year, while GAAP EPS reached $10.01, reflecting a $3.99 year-over-year gain. The company’s fourth-quarter revenue climbed 19% to $90.8 billion, driven primarily by surging volumes in U.S. Pharmaceutical operations and continued strength in specialty drug distribution, including oncology. For the full fiscal year, McKesson generated $359.1 billion in revenue, up 16%, and posted adjusted EPS of $33.05, marking 20% growth, underpinned by strong operational execution and disciplined capital deployment.
Performance was strong across the company’s segments. The U.S. Pharmaceutical business remained the core growth engine, with Q4 revenues rising 21% and adjusted segment profit up 17%, fueled by volume gains from national retail customers and expanding specialty drug distribution. The Prescription Technology Solutions segment also delivered, posting 13% revenue growth and a 34% jump in adjusted operating profit, as demand continued to rise for affordability and access programs. Meanwhile, Medical-Surgical Solutions saw modest revenue growth of 1%, though cost optimization helped drive a 15% lift in adjusted segment earnings. International operations declined 2% in revenue due to divestitures, but still managed a 9% increase in adjusted profit, thanks to improved pharmaceutical distribution in Canada.
Capital returns were a standout story. McKesson generated $6.1 billion in operating cash flow and $5.2 billion in free cash flow during the fiscal year, returning $3.5 billion to shareholders, including $3.1 billion in buybacks. The company also took a major strategic step, announcing its intent to spin off the Medical-Surgical Solutions segment into a separate, independent company. Management believes the move will unlock significant value and allow both McKesson and the future “NewCo” to focus more acutely on their respective growth strategies – especially as McKesson doubles down on high-margin, high-growth areas like oncology and biopharma services.
Looking ahead, McKesson issued fiscal 2026 adjusted EPS guidance of $36.75 to $37.55, representing 11-14% growth over FY25, and 13-16% growth when excluding gains from McKesson Ventures in the prior year. The company reaffirmed its long-term EPS growth target of 12-14%, and raised its U.S. Pharmaceutical segment’s long-term profit growth forecast to 6-8%, citing momentum in specialty distribution.
Following the results, several analysts – including BofA Securities, TD Cowen, and Jefferies – raised their price targets on McKesson shares, highlighting the quality of earnings, strategic clarity, and upside potential from the pending business separation.
❖ Texas Pacific Land (TPL) delivered a strong start to 2025, reporting robust Q1 results fueled by record royalty volumes and continued expansion across its water and surface operations. Net income climbed to $120.7 million, up from $114.4 million a year ago, while diluted EPS increased to $5.24, a 5% year-over-year gain. Total revenue rose 13% to $196.0 million, with oil and gas royalties surging 21% to $111.2 million, driven by a 25% increase in production volumes to 31.1 thousand Boe per day. Realized commodity prices were mixed – oil prices dipped, while gas and NGL pricing improved year-over-year.
Water Services and Operations also showed resilience. Water sales reached $38.8 million, up from $37.1 million, supported by a 14% increase in volume, while produced water royalties held steady at $27.7 million. Easement and surface-related income came in at $18.2 million, down from the prior year but within historical ranges. Operating income reached $150.1 million, up 10%, with adjusted EBITDA at a record $169.4 million, reflecting an 86% margin. Free cash flow totaled $126.6 million, maintaining a solid 65% margin despite rising capex related to water infrastructure and desalination initiatives.
Strategically, TPL continues to optimize its vast Permian Basin footprint. With over 873,000 surface acres and 207,000 net royalty acres, the company benefits from development activity across multiple revenue streams without direct capex exposure in oil and gas. Notably, TPL advanced its desalination technology, building a 10,000 bbl/d pilot plant aimed at converting produced water into usable discharge, potentially unlocking new monetization paths in water recycling.
Looking ahead, management reaffirmed its capital discipline, targeting a $700 million cash balance while continuing to return capital through dividends. TPL declared a quarterly dividend of $1.60 per share, up 37% year-over-year. With no debt, significant free cash generation, and unmatched leverage to Permian development, TPL remains a premier play on long-cycle energy infrastructure.
❖ Uber Technologies (UBER) delivered a strong Q1 2025, reporting its fifth consecutive quarter of GAAP profitability while posting robust growth across key metrics and offering upbeat guidance for Q2. Net income reached $1.8 billion, compared to a loss of $654 million in Q1 2024, boosted by operating leverage and a modest $51 million pre-tax gain from equity investment revaluations. Adjusted EBITDA rose 35% year-over-year to $1.87 billion, with a margin of 4.4% on Gross Bookings – a 70 basis point improvement from the prior year. Free cash flow hit $2.25 billion, up 66%, as Uber continues to transform revenue scale into high-quality cash flow.
Gross Bookings for the quarter rose 14% YoY (or 18% in constant currency) to $42.8 billion, driven by an 18% increase in trips and a 14% rise in Monthly Active Platform Consumers (MAPCs) to 170 million. Revenue increased 14% to $11.53 billion, slightly below the analyst consensus of $11.6 billion. EPS came in at $0.83 – sailing past the consensus estimate of $0.54 – driven by improved operating efficiency and higher-than-expected net income.
Looking ahead, Uber issued confident Q2 2025 guidance: it expects Gross Bookings between $45.75 billion and $47.25 billion, representing 16-20% constant currency growth. This range brackets the Street consensus of $45.83 billion. Adjusted EBITDA is projected between $2.02 billion and $2.12 billion, slightly above the consensus estimate of $2.04 billion.
Uber ended the quarter with $6.0 billion in unrestricted cash and investments and repurchased $1.8 billion in stock, underscoring its shift from growth-at-all-costs to shareholder return and capital discipline. CEO Dara Khosrowshahi emphasized a continued focus on automation, cross-platform synergies, and high-efficiency customer acquisition, highlighting that 30% of new Delivery users originated from the Mobility app. With autonomous vehicle partnerships – including Waymo –expanding, and Delivery grocery volume nearing a $10 billion annual run rate, Uber is clearly signaling its intent to dominate local commerce end-to-end.
Following the results and bullish Q2 outlook, several analysts – including J.P. Morgan, Raymond James, Susquehanna, Jefferies, and others – reiterated “Strong Buy” ratings and raised their price targets, citing Uber’s accelerating cash flow profile, deepening network effects, and growing optionality in autonomy and local logistics.
❖ Bank of America Securities has named chipmakers Nvidia and Broadcom (AVGO) as “Top Picks” in semiconductors for 2025. BofA analysts cite these chipmakers’ leadership in AI hardware and custom silicon, and anticipate they will be the biggest beneficiaries of the ongoing AI capex boom. They projects that hyperscalers – Microsoft (MSFT), Alphabet (GOOGL), Meta, and Amazon – will continue boosting their AI capex this year and next, reaffirming a bullish outlook for data center and AI infrastructure spending.
❖ Alphabet’s (GOOGL) stock took a hit last week after Eddy Cue, Apple’s senior VP of Services, said search volume on Apple was down in April for the first time in 20 years because people are using AI chatbots, and indicated that Apple is considering adding AI providers as search options on Safari. GOOGL recouped some of the losses on Friday – before proceeding to surge this week on alleviated tariff worries – as the company said that AI search hasn’t negatively impacted its search business, and that it continues to see overall query growth in Search, including an increase in total queries coming from Apple’s devices and platforms.
Despite the rebound, investor concerns have intensified around the long-term competitive threat posed by generative AI. Wedbush removed Alphabet from its “Best Ideas” list, citing growing uncertainty and heightened volatility as AI disrupts traditional search behavior. The firm still considers Alphabet a strong long-term investment, but warned that it may take time for Google to prove to the market that it can defend its moat.
JPMorgan attributed the selloff to fears of share loss and rising competition from players like OpenAI and Perplexity. While JPMorgan called the move “overdone,” it acknowledged that the pressure adds to two years of negative sentiment around Google’s search dominance. Morgan Stanley similarly called the stock sentiment “troughed” and sees current levels – trading at ~15x FY26 EPS – as a tactical buying opportunity.
Evercore ISI and Citi also defended the stock, both reiterating Buy-equivalent ratings. Evercore highlighted that Alphabet’s statement on query growth plausibly points to overall Safari browser weakness rather than a Google-specific issue. Citi, meanwhile, sees upside in Alphabet’s AI roadmap, pointing to strength in Gemini 2.5 and the expansion of AI Mode.
Notably, Bloomberg reported that Apple has no intention of building a general-purpose search engine, a key clarification that should ease fears of a vertical integration play.
Alphabet’s annual developer conference, Google I/O (May 20-21), will be closely watched for signs of product momentum. With investor focus squarely on AI, success in showcasing updates to search integration, Gemini models, Cloud and Workspace tools, and Android innovation could serve as a meaningful near-term catalyst.
❖ CrowdStrike Holdings (CRWD) had a rough time last week, dropping on news that its top executives are part of a government probe involving a technology distributor, Carahsoft Technology. CrowdStrike is under investigation for booking a $32 million sale to Carahsoft in 2023, despite the fact that the IRS – the intended end customer – never received or agreed to the purchase. A CrowdStrike statement said: “This is old news and the fact remains we stand by the accounting of the transaction.” The investigation by the DOJ and the SEC was first reported in February 2025, resurfacing last week after Bloomberg report revealed that investigators are now focusing on what senior CrowdStrike executives knew about the deal and are examining other company transactions. Investigators are reportedly also reviewing other transactions CrowdStrike booked with similar partners.
The DOJ and SEC are still in the evidence-gathering stage as of May 2025, continuing to collect records and conduct interviews. This indicates that the investigation remains in its early phase – one that could take well into mid-to-late 2026 before any resolution or enforcement action materializes. For that reason, we are not moving CrowdStrike into our “Under Review” bracket – let alone considering a sale – as the company’s business fundamentals and growth potential remain intact. That said, we will continue to monitor developments closely, particularly for signs of restatements, executive turnover, or regulatory escalation.
Another area to watch is the news that CrowdStrike co-founder and CEO George Kurtz has reduced his ownership stake from approximately 31% to just 2.5%. In the process, he triggered the conversion of all his supervoting Class B shares – each carrying 10 votes per share – into regular Class A shares with standard voting rights. As a result, Kurtz’s voting power in the company fell by approximately 92%. More than $1 billion worth of stock was classified as “gifts,” with the company citing estate planning and philanthropic activities. This reduction in both ownership and control represents a major shift in CRWD’s governance structure – an uncommon move for a founder-CEO still at the helm. The change was broadly welcomed by investors, as it could lead to a more balanced governance model and make the company more appealing to institutions that prefer less founder-dominated structures.
❖ Microsoft (MSFT) announced on Tuesday that it will lay off approximately 6,000 employees, or about 3% of its global workforce, as part of an effort to streamline management layers. The reductions will span business segments, geographies, and employee levels. This move is not unprecedented; Microsoft has historically implemented targeted layoffs to support strategic realignment, organizational efficiency, or cost management. Barclays analysts said they view the latest round of layouts as “a commitment to profitable growth,” as AI infrastructure costs continue to rise.
In other company news, Microsoft secured a major legal victory this week after a federal appeals court rejected the Federal Trade Commission’s challenge to its $69 billion acquisition of Activision Blizzard. The ruling effectively ends the government’s opposition and cements Microsoft’s position as a dominant force in the gaming industry, among others.
❖ The Kroger Company (KR) has experienced a notable decline this week, along with other grocery stocks that had previously served as safe havens for investors concerned about the trade war and its economic fallout. Now, as the flight-to-quality trade gives way to a renewed rush toward growth, investors are rotating out of the names once perceived as the safest during the tariff storm.
❖ Lockheed Martin (LMT) has seen its stock decline over the past two days, along with several other major defense names. This comes despite upbeat headlines surrounding Saudi Arabia’s announcement of a $142 billion investment in U.S. defense equipment – including warplanes, missile defense systems, and related technologies – a deal expected to strongly benefit contractors like LMT.
The defense sales are part of a broader $600 billion Saudi commitment to invest in U.S. companies and the American economy. As part of the announcement, Saudi officials said they will acquire “state-of-the-art warfighting equipment and services from over a dozen U.S. defense firms,” positioning this as one of the largest such agreements in recent memory.
Still, despite Tuesday’s positive deal news, defense stocks largely continued to slide as investors rotate back into mega-cap technology and other high-growth sectors. While the Saudi deal is a clear long-term positive for companies like Lockheed, the near-term easing of macro risks – including de-escalating trade tensions – has dulled investor appetite for defensive plays. As a result, the profit potential from this major contract may be temporarily overshadowed by shifting market sentiment.
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Portfolio Stocks Under Review
❖ We are removing Uber (UBER) from the “under review” list following its strong Q1 results and confident Q2 guidance, as detailed in the Portfolio News and Updates section above. The company delivered better-than-expected EPS, accelerating free cash flow, and reiterated long-term growth across core segments. Regulatory risks remain, but Uber’s platform leverage, execution, and improving profitability reaffirm our conviction. We are maintaining the position.
❖ We are placing McKesson (MCK) under review despite the strong results it delivered in fiscal Q4 and full year 2025, as detailed in the Portfolio News and Updates section above. The decision to put it on the watchlist for a possible sale from the Portfolio comes as a result of the recent drug pricing policy shift.
On May 12, President Trump’s stated that his administration will “cut out the middlemen” to lower drug prices – a policy stance that, if implemented, could significantly affect core components of McKesson’s distribution model.
As one of the largest pharmaceutical wholesalers in the U.S., McKesson’s role as an intermediary between manufacturers and pharmacies is central to its business model. Proposals that promote direct-to-consumer pricing models or adopt Most-Favored-Nation pricing benchmarks could diminish McKesson’s margin capture, reduce its negotiating leverage, or reshape volume-based incentives. While specifics remain limited, the direction of policy introduces a material overhang on the company’s long-term earnings power.
McKesson remains a fundamentally stellar cash-generative compounder – however, with drug distribution representing the lion’s share of operating profits, the stock is now exposed to elevated policy and regulatory risk.
We will closely monitor the legislative or executive path of implementation, the scope and timeline of any rulemaking or pricing mandates, and management’s strategic responses. Until greater clarity emerges, we are not selling the position, but are placing MCK under active review, with a follow-up assessment to come as the situation develops.
❖ We are placing Verizon Communications (VZ) under review for a potential sale as the company faces renewed competitive pressure at a time when market dynamics appear to be shifting away from defensive names. While Verizon’s fundamentals remain stable, the broader context is evolving in ways that warrant closer scrutiny.
Verizon delivered solid first-quarter results three weeks ago, including better-than-expected revenue, record adjusted EBITDA, and robust free cash flow. At the time, equity markets were in the grip of tariff-driven volatility, and capital flowed toward value-oriented, dividend-rich names like Verizon. The stock’s defensive profile, consistent cash generation, and 6.2% dividend yield offered insulation against policy uncertainty and a weakening macro backdrop. That cushion allowed investors to overlook concerns such as the 289,000 postpaid phone subscriber losses in Q1, which reflected continued headwinds from aggressive competition and pricing pressures in the wireless space.
More recently, however, the narrative has shifted. A sharp rebound in tech and growth stocks, fueled by optimism around easing trade tensions and improving risk sentiment, has triggered a rotation out of defensive sectors like telecom. VZ shares have come under pressure as a result, declining more than 3% since the start of May. Adding to the drag was insider selling activity, including the sale of 9,000 shares by CEO Kyle Malady last week – a move that, while not alarming in isolation, reinforces investor hesitation about near-term growth.
Valuation remains modest, with a forward P/E of 9.3 and a price-to-FCF ratio below historical norms. But without a near-term catalyst to re-accelerate subscriber growth or expand margins, we’re increasingly unsure that this discount alone justifies holding the position in a market that is re-pricing for expansion and innovation. If investor preference for growth persists – particularly in sectors tied to AI, cloud, and digital infrastructure – VZ may struggle to keep pace and could trade sideways even as fundamentals remain intact.
Against this backdrop, we are placing Verizon under review. The company continues to offer income stability and financial strength, but we are re-evaluating whether its defensive profile is still a net asset in the current market environment. We will revisit our position once we have greater clarity on sector rotation trends and competitive momentum in the telecom space.
❖ We continue to monitor RTX (RTX) closely, as the company remains at the intersection of strong operational momentum and a fluid global trade environment. While RTX delivered a robust first-quarter performance and maintained confident full-year guidance, we previously placed the company under review due to a significant external risk: tariffs. The company itself acknowledged that, if unmitigated, the combination of direct and indirect tariff-related costs could reduce its 2025 operating profit by as much as $850 million.
In recent days, however, the landscape has shifted. Encouraging developments on the trade front have started to alleviate some of the pressure. Chief among them is a new trade agreement between the United States and the United Kingdom. The deal includes provisions that lower or eliminate tariffs on aerospace, steel, and aluminum – three sectors directly relevant to RTX’s operations. As one of the few defense and aerospace companies with a cross-border supply chain that touches both countries, RTX stands to benefit meaningfully from reduced costs and improved sourcing efficiency tied to its U.K. operations.
Perhaps even more materially, a breakthrough emerged on May 12 when the U.S. and China agreed to a 90-day reduction in reciprocal tariffs. Though temporary, the impact on RTX is significant. This tariff pause comes at a critical time, directly easing cost burdens in several parts of RTX’s supply and production chain, including imported avionics, rare-earth materials, and titanium and aluminum castings. It also offers relief for the company’s tier-2 U.S. suppliers that had been absorbing high input costs, stabilizing pricing and easing mid-tier margin compression across the company’s procurement ecosystem.
Analysts estimate that this 90-day window alone could save RTX between $125 and $175 million, with additional benefits expected from secondary effects such as supplier margin recovery and enhanced flexibility in pricing. These developments provide a much-needed buffer, softening what had been shaping up to be a more severe margin headwind in the second half of the year.
That said, the underlying risks have not fully disappeared. The tariff truce with China is temporary, and the threat of renewed hostilities remains a looming concern once the 90-day window expires. Meanwhile, progress with other key trading partners has been limited, and structural trade tensions could quickly resurface in today’s volatile geopolitical climate.
Against this backdrop, we are maintaining our “Under Review” designation for RTX. The company’s operational fundamentals remain solid, and the recent easing of trade pressures marks a welcome development. But until the external environment stabilizes further – and the longer-term trajectory of U.S. trade policy becomes clearer – we believe it is prudent to continue monitoring RTX.
❖ We are keeping Charles Schwab Corporation (SCHW) under review, at least until its upcoming annual meeting on May 22, 2025.
We have placed the stock under review despite its blockbuster Q1 earnings report and praises from several Wall Street analysts. An activist shareholder, John Chevedden, has recently submitted proposals advocating for the declassification of Schwab’s board structure, aiming to enhance shareholder influence over the company’s management and make the board more accountable to shareholders. The board has expressed opposition to these changes, but they are scheduled to be addressed in full at Charles Schwab’s annual shareholder meeting on May 22.
Schwab’s core business remains fundamentally sound, and we are bullish on its long-term viability. As a leading brokerage and financial services firm, Schwab has shown resilience through various market cycles, benefiting from a robust client base and a comprehensive suite of investment products. However, the internal dispute introduces additional company-specific uncertainty amid broad market volatility, driving our decision to keep SCHW under a magnifying glass for the next few weeks.
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Portfolio Earnings and Dividend Calendar
❖ The Q1 2025 earnings season is drawing to an end, and although several Smart Portfolio companies are yet to report their results, these will be published later this month and in June. However, one important report is coming today after hours – Cisco Systems (CSCO).
❖ The ex-dividend date for Microsoft (MSFT) and Kroger Company (KR) is May 15.
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New Buy: Leidos Holdings (LDOS)
Leidos Holdings, Inc. is a top-tier government services and technology contractor, specializing in defense, intelligence, civil, and health markets. Headquartered in Reston, Virginia, the company serves a broad range of U.S. federal agencies, including the Department of Defense (DoD) and the Intelligence Community (i.e., the CIA, NSA, and other classified national security agencies). Leidos is the largest U.S. government IT contractor by revenue and has ranked #1 on the Washington Technology Top 100 list for five consecutive years. With a diversified, mission-critical portfolio and deep expertise in systems integration, data analytics, cybersecurity, and aerospace technologies, Leidos benefits from long-cycle contracts and a substantial funded backlog. Its strategic focus on national security, digital modernization, and resilient infrastructure positions it as a dependable, less cyclical compounder with strong recurring revenue characteristics.
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Contract and Conquer
Leidos traces its roots to 1969, when it was founded as Science Applications International Corporation (SAIC) by physicist Dr. J. Robert Beyster. Originally focused on government scientific and engineering services, the company built a reputation for solving complex national security problems through applied science and systems integration. Its transformation into a leading defense and technology integrator began in earnest following a 2013 corporate split, when the legacy SAIC restructured into two independent entities – with Leidos taking on the national security, civil, and health businesses.
Over the past five years, Leidos has executed a strategic evolution that reinforces its position as the top government technology contractor in the U.S. This transformation has been driven by a combination of focused acquisitions, accelerated investment in emerging technologies, and expanding partnerships across the defense and intelligence ecosystem.
In 2020, Leidos acquired Dynetics, significantly strengthening its capabilities in hypersonics, space systems, and advanced weaponry. That same year, it purchased L3Harris’ Security Detection and Automation Systems division, which added mission-critical capabilities in airport screening and border security infrastructure. Together, these deals extended Leidos’ reach across both defense and civil markets.
Innovation has been equally important to the company’s momentum. In 2023, Leidos began deploying large language models (LLMs) in healthcare analytics – part of its Trusted GenAI initiative – to streamline workflows in clinical and regulatory settings. This built on prior investments in AI and machine learning (ML), and marked a meaningful step in adapting generative tools to high-stakes government use cases.
Strategic alliances have further extended the company’s platform. Leidos has launched multi-year programs with Microsoft and Amazon Web Services to embed secure cloud infrastructure and AI-enabled solutions across federal missions – from battlefield systems to national health IT.
Under CEO Thomas Bell, who assumed leadership in 2023, Leidos has sharpened its strategic focus while doubling down on operational execution and technology leadership. Following a brief pause in dealmaking, the company resumed M&A in 2025, announcing a definitive agreement to acquire a cyber defense firm – unnamed as of this writing – for approximately $300 million. The target, known for its work with the DoD and Intelligence Community, including DARPA programs, is expected to bolster Leidos’ capabilities in vulnerability research, reverse engineering, exploit development, and cyber-electronic warfare. The deal aligns with Leidos’ NorthStar 2030 strategy and is slated to close in the second quarter.
Through these moves, Leidos continues to solidify its standing as a premier provider of mission-focused solutions for federal clients – with a forward-looking strategy built on resilience, modernization, and national security.
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Edge of Authority
Leidos operates a structurally resilient business model built around delivering mission-critical technology and engineering services to federal agencies, with a growing presence in commercial and international markets. Though classified as an IT services provider, the company functions more like a high-stakes integrator – combining systems engineering, secure software, and domain-specific expertise in defense, health, civil infrastructure, and intelligence operations.
Its operations span four segments. The largest, National Security & Digital, generates over 44% of revenue and includes cyber, intelligence, and IT modernization programs. Health & Civil contributes roughly 30%, handling healthcare IT, life sciences research, and public infrastructure projects for civilian agencies. A smaller but expanding Commercial & International segment accounts for 13%, serving private-sector clients and allied governments in energy, transportation – including airport systems – and industrial applications. Defense Systems rounds out the portfolio at around 12%, covering logistics, weapons support, and emerging capabilities like hypersonics.
More than three-quarters of Leidos’ revenue is consistently tied to U.S. federal government contracts, supporting LDOS’ unusually high degree of revenue visibility. A large portion of its income comes from multi-year, often sole-sourced1 contracts with agencies such as the Department of Defense, Department of Homeland Security, and the Intelligence Community. These contracts typically involve long-duration engagements and recurring services, from cybersecurity and cloud support to field operations and logistics, offering a level of predictability that few peers in commercial IT can match.
LDOS continues to deepen its positioning through focused strategic programs. NorthStar 2030, its long-term planning framework, targets growth in next-generation defense systems, space technologies, cyber-electronic warfare, and applied AI. Within this context, the company’s Trusted GenAI initiative is already delivering tangible deployments, particularly in healthcare and intelligence environments where accuracy, interpretability, and compliance are non-negotiable. These efforts underscore Leidos’ commitment to integrating frontier technologies without compromising mission assurance.
Despite operating in a contracting and procurement-heavy sector, Leidos has also embedded a scalable digital backbone. Its investments in secure cloud platforms, software-enabled service delivery, and zero-trust architectures have strengthened both cost efficiency and margin durability. With its combination of long-cycle contracts, high barriers to entry, and a forward-leaning technology agenda, Leidos’ model delivers stable, defensible growth – one deeply insulated from cyclical swings – and is well-positioned to expand as digital modernization becomes a permanent mandate in national security.
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1 – Sole-source contract refers to a government contract that is not competitively bid but is instead awarded directly to a single contractor. This typically occurs when only one supplier is deemed capable of fulfilling the mission, when urgency precludes a competitive process, or when national security concerns favor a known and trusted vendor.
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Mission Margin
Leidos continues to demonstrate a structurally resilient financial profile, underpinned by long-cycle federal contracts and disciplined program execution. In Q1 2025, LDOS reported revenue of $4.25 billion, up 7% year-over-year and slightly ahead of consensus expectations of $4.21 billion. Adjusted EPS came in at $2.97, a 30% increase over the prior year, also beating the consensus estimate of $2.85. Adjusted EBITDA rose 23% to $601 million, with margin expanding to 14.2%, up from 12.3% a year earlier – reflecting both volume leverage and improved program-level cost control.
Growth was broad-based across LDOS’ four operating segments. Health & Civil led the quarter, with revenue up 8% year-over-year on increased complexity and volume in its managed health services contracts. Operating margin in the segment reached a robust 23.2%. National Security & Digital, the company’s largest segment, grew 5%, driven by increased demand on programs such as Sentinel – the U.S. Air Force’s next-generation nuclear missile system – as well as classified intelligence contracts supporting surveillance, cyber operations, and AI-driven data processing. Defense Systems expanded 7% on strength in hypersonics and space sensing. Commercial & International rose 12%, benefiting from increased deliveries of airport screening systems and other physical security products, alongside higher services volume in the United Kingdom tied to government and infrastructure clients.
Leidos reaffirmed its full-year 2025 guidance, projecting revenue between $16.9 billion and $17.3 billion and adjusted EPS of $10.35 to $10.75. These ranges bracket the current Street consensus of $17.1 billion and $10.55, respectively. The company also expects operating cash flow of approximately $1.45 billion, providing ample flexibility for ongoing capital returns and reinvestment. At the end of the quarter, LDOS had $842 million in cash and $5.1 billion in debt, having just completed a $500 million accelerated share repurchase.
The company’s backlog reached a record $46.3 billion during the quarter, up from $41.7 billion a year earlier. Of that total, $7.3 billion is funded, reflecting signed contracts with appropriated budgets. The remainder represents future awards under existing programs, including sole-source IDIQ2 contracts – reinforcing LDOS’ high revenue visibility and multi-year growth runway. This is critical in an environment where policy volatility can disrupt less insulated industries.
Importantly, management expects favorable tailwinds from the proposed FY26 U.S. federal budget, which outlines a multi-year expansion in defense and homeland security spending. Programs tied to strategic deterrence, space resilience, and critical infrastructure protection are expected to receive elevated funding, aligning closely with Leidos’ core competencies. The recent $205 million IT modernization award from the Defense Threat Reduction Agency and other contract wins in submarine training, autonomous systems, and federal health services validate Leidos’ role as a high-trust, go-to integrator in these domains.
While its growth profile remains tethered to the pace and stability of government procurement cycles, LDOS’ consistent execution, expanding digital capabilities, and historically high backlog leave it well-positioned for continued upside in 2025 and beyond.
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2 – IDIQ stands for Indefinite Delivery, Indefinite Quantity. It refers to a type of government contract that sets terms for future work over a fixed period, but without specifying exact quantities or delivery dates upfront. Instead, the government issues task or delivery orders as needs arise, up to a stated ceiling. This structure offers flexibility for recurring or evolving mission requirements.
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Payback Protocol
Leidos’ stock has gained about 7% in the past year – underperforming the S&P 500 but registering higher return than most of its peers in the industry. LDOS, along with its closest peers, experienced significant stock declines from end-January to March – leading to their underperformance vis-à-vis the broad index – primarily due to a combination of sector-specific concerns and broader market factors.
Thus, the establishment of DOGE, aimed at reducing federal spending, raised investor concerns about potential cuts in government contracts, while the $580 million in DoD spending cuts announced by Secretary Pete Hegseth in March 2025 contributed to investor apprehension. However, as investors gained more clarity – with DOGE only canceling a small gender-policy contract with LDOS, and DoD spending cuts focused on programs unrelated to Leidos, such as diversity initiatives – the stock returned to steady gains, rising by over 20% since the beginning of March and strongly outperforming the S&P 500 year-to-date.
Despite this outperformance, LDOS remains very attractively valued, trading significantly below the Industrial sector3 averages in terms of TTM and Forward P/E and EV/EBITDA. in terms of TTM and Forward P/E and EV/EBITDA. The company also screens toward the lower end of the scale on these metrics relative to its closest peers, despite delivering higher returns on assets, equity, and total capital than most – along with superior net income and EPS growth. Moreover, based on future cash flows, Leidos appears to be undervalued by about 45%, reinforcing the strength of its investment case.
Beyond past and potential share-price appreciation, Leidos rewards its shareholders through dividends, which it has been disbursing for over a decade. Although its dividend yield of 1% is modest, the company’s strong financials and low payout ratio support the outlook for continued dividend growth in the years ahead.
On top of all this, LDOS performs extensive buybacks as part of its capital allocation strategy to enhance shareholder value. The company maintains an active buyback authorization, approved in 2022 for the repurchase of up to 20 million shares of common stock through various methods, including open market purchases and accelerated share repurchase (ASR) agreements. Under this authorization, Leidos has executed several programs. In February 2025, it announced a $500 million ASR agreement, under which it made an initial payment of $500 million and received approximately 3 million shares.
Taken together, the stock’s resilience – stemming from its defensive and offensive qualities – coupled with modest valuation, generous capital return strategy, and fundamental strength, position it as a rare value compounder in the national security ecosystem.
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3 – Leidos is classified under the Industrials sector, specifically the Aerospace & Defense industry, and not Technology sector, because of classification standards, business mix, and end-market exposure.
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Investing Takeaway
Leidos is a mission-focused compounder, operating at the intersection of national security, digital modernization, and technical integration. With core strengths in defense IT, secure cloud, and AI-driven analytics, LDOS supports long-cycle government contracts across agencies like the DoD and Intelligence Community. The company combines high barriers to entry with a scalable digital backbone, enabling durable margin performance and multi-year visibility. Despite delivering strong execution and accelerating returns, LDOS trades at a meaningful discount to sector peers on both earnings and enterprise value metrics. Supported by a record backlog, expanding defense tailwinds, disciplined capital returns, and a structurally resilient model, Leidos offers investors a rare blend of visibility, value, and momentum – all within one of the most strategically vital sectors of the U.S. economy.
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Smart Investor’s Winners Club
The 30% Winners Club includes stocks from the Smart Investor Portfolio that have risen at least 30% since their purchase dates.
Markets seem to be back in rally mode, but our Winners list remained unchanged so far, still holding 12 stocks: GE, AVGO, ANET, HWM, TPL, EME, TSM, ORCL, APH, PH, IBKR, and CRWD.
However, there is a notable action right below the 30% threshold, as UBER (up 28.17% since purchase) and IBM (with a gain of 22.99%) surpassed the previous first contender BRK.B in a bid to join the Club. Will they gain this rite of passage, or will another stock outrun them to the finish line?
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Disclaimer
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