Leidos (LDOS) Assessment Report on Government Spending Cycles and VA Contract Risks

Based on the in-depth analysis above, I will provide you with a systematic assessment report on the impact of changes in government spending cycles on Leidos’ valuation.

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Leidos’ current stock price is

, representing a pullback of approximately 4.5% from its 52-week high of $205.77[0]. The primary concern behind Stifel’s rating downgrade—slowing growth in VA contracts—is indeed a risk factor that warrants attention, but this risk may have been fully priced in by the market. The company is currently trading at a , representing a relative to the industry average of around 25x[0][1]. DCF valuation shows that in the base scenario, the fair value is , representing an from the current price[0].

: The impact of slowing VA contract growth is structural but manageable, with Leidos’ diversified business portfolio and trends in defense IT modernization providing a buffer. The short-term rating downgrade is a normal market sentiment reaction, and long-term investment value depends on the company’s ability to successfully transition to high-growth areas.

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According to Leidos’ FY2024 Annual Report, 87% of the company’s revenue comes from U.S. government contracts, with the

; VA contracts are a key component of this segment[2]. The core reasons for slowing VA contract growth include:

Impact Factor	Specific Performance
Budget Cycle Pressure	The VA faces ongoing budget reviews, and priorities for IT modernization spending may be adjusted
Contract Recompetition Risk	High-margin VA contracts face uncertainties in re-tendering
Policy Uncertainty	Increased contract reviews brought about by the Department of Government Efficiency (DOGE) reforms

According to a GovExec report, the most high-profile event in the government contracting space in 2025 was the DOGE (Department of Government Efficiency) review of federal contracts. Although Leidos’ contract with the Social Security Administration (SSA) was falsely reported as canceled, actual data shows that contract execution is proceeding normally[3]. This reflects an overreaction in the market to policy risks.

: Slowing VA contract growth is expected to continue. The reasons are as follows:

• The federal budget faces austerity pressures, limiting growth in non-defense government IT spending
• Uncertainties from DOGE reforms have delayed some contract decisions
• The VA’s internal priorities are shifting from IT modernization to direct medical services

: The growth slowdown may stabilize. The reasons include:

• The VA’s long-term demand for IT modernization remains rigid (electronic health record systems, veteran health management)
• Historical patterns show that government IT contracts are cyclical, but the long-term growth trend remains unchanged
• Leidos has a deep contract foundation with the VA and strong customer stickiness

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U.S. government spending exhibits obvious cyclical characteristics, closely tied to presidential terms, election cycles, and defense budget cycles:

Cycle Phase	Characteristics	Impact on Government Contractors
Expansion Phase	Budget increases, new project launches	Accelerated order growth, valuation expansion
Stabilization Phase	Flat budgets, contract execution period	Stable cash flow, valuation contraction
Adjustment Phase	Budget reviews, contract re-examinations	Slower growth, valuation pressure
Recovery Phase	New administration takes office, new cycle begins	Improved expectations, valuation recovery

The FY2026 National Defense Authorization Act (NDAA) authorizes a

defense budget, representing a from FY2025[4]. This growth is primarily driven by digital modernization, with the Research, Development, Test and Evaluation (RDT&E) budget reaching , a [4]. This constitutes a structural tailwind for Leidos’ core business.

Government Contractor Valuation = f(Backlog, Cash Flow Stability, Contract Recompetition Risk, Policy Sensitivity)

:

• Beta Coefficient of 0.59
  : Significantly lower than the overall market, with lower volatility[0]
• Stable Free Cash Flow
  : FY2024 FCF reached $1.243 billion, with positive FCF margin[0]
• Sufficient Order Backlog
  : Recently awarded several large contracts, including:
  • U.S. Air Force Maintenance Support Contract:
    $987 million
    [5]
  • Army Force Protection Program Contract:
    $249 million
    [5]
  • CDC IT Modernization Services Contract:
    $51 million
    [6]

:

• High Policy Sensitivity
  : 87% of revenue comes from government contracts
• Contract Renewal Risk
  : Large contracts are typically re-tendered every 3-5 years
• Profit Margin Pressure
  : The government is shifting from cost-plus contracts to fixed-price contracts

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Indicator Category	Value	Evaluation
Market Capitalization	$25.14 billion	Large government contractor
P/E (TTM)	17.89x	Below industry average of 25x, valuation discount
P/B	5.12x	Moderate, reflects goodwill value
ROE	30.81%	Excellent, strong shareholder return capability
Net Profit Margin	8.11%	Healthy
Current Ratio	1.62	Strong short-term solvency
Debt Risk Rating	Medium Risk	Moderate financial aggressiveness[0]

Results based on a three-scenario DCF model show[0]:

Scenario	Assumptions	Valuation	Relative to Current Price
Bear Case	Zero growth, lower profit margins	$143.16	-27.2%
Base Case	7.9% historical average growth	$214.03	+8.9%
Bull Case	10.9% high growth	$402.32	+104.6%
Probability-Weighted	Combined scenarios	$253.17	+28.8%

: The current price of $196.61 falls between the bear and base cases, reflecting the market’s cautious pricing of VA contract risks. If the trend of defense IT modernization continues, the company is expected to converge toward the base case valuation.

FY2024 revenue reached

, representing a 7.9% year-over-year increase[2]:

Fiscal Year	Revenue (USD millions)	YoY Growth	Net Profit (USD millions)
FY2022	$14,396	-	$685
FY2023	$15,438	+7.2%	$199
FY2024	$16,662	+7.9%	$1,254

The sharp decline in FY2023 net profit was mainly due to goodwill impairment ($596 million), a one-time non-cash expense. Excluding this factor, profitability remains solid[2].

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Indicator	Value	Signal Interpretation
MACD	No Crossover	Neutral with Bullish Bias
KDJ	K:73.6, D:62.5, J:95.7	Short-term Overbought Risk
RSI(14)	Overbought Range	Pullback Pressure
Trend Judgment	Sideways Consolidation	No Clear Direction[0]
Support Level	$186.80	-
Resistance Level	$198.87	-

Rating	Number of Institutions	Percentage
Buy/Overweight	20	74.1%
Hold/Neutral	7	25.9%
Sell	0	0%
Consensus Target Price	$222.50	+13.2% Upside Potential [1]

: Stifel resumed coverage with a Buy rating in June 2025, but recently downgraded to Hold due to concerns over VA contracts. This is a prudent adjustment by an individual institution regarding specific risks, rather than a systematic bearish view[7].

Leidos has risen

over the past 6 months and over the past year, indicating continuous institutional capital inflows[1]. The recent pullback is a technical consolidation and does not signal capital flight.

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The U.S. government IT services market is highly concentrated, with key players including:

Company	Positioning	Areas of Strength
Leidos	Integrated Government Contractor	Defense IT, Healthcare IT
Booz Allen Hamilton	Management Consulting	Intelligence, Defense Consulting
General Dynamics IT	Defense IT	Military Systems Integration
CACI International	Defense Technology	Cybersecurity, Intelligence
Science Applications International (SAIC)	Government Services	Aerospace, Systems Engineering

Leidos’ differentiated advantages include:

• Diversified Business Portfolio
  : Defense (44%), Health & Civil (30%), Commercial & International (14%), Defense Systems (12%)[2]
• Depth of Technical Capabilities
  : Presence in cutting-edge fields such as AI, cybersecurity, and autonomous systems
• Stable Customer Relationships
  : Long-term partnerships with core agencies including the DoD, VA, and FAA

The FY2026 defense budget tilts toward digital modernization, which constitutes a direct tailwind for Leidos:

• 27% Growth in RDT&E Budget
  : Increased R&D spending benefits technology-focused contractors
• Increased Cybersecurity Budget
  : Growing demand for zero-trust architecture and quantum cryptography
• Replicator Initiative
  : Unmanned aerial vehicles and anti-drone systems drive demand for autonomous technologies
• Multi-Domain Operations Concept
  : Joint combat capability development promotes systems integration business[4]

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Risk Factor	Impact Level	Probability	Risk Rating
Slowing VA Contract Growth	High	Medium	Focus
DoD Budget Cuts	High	Low	Monitor
DOGE/Government Reform Risks	Medium	High	Focus
Delays in Defense IT Modernization	Medium	Low	Monitor
Loss of Contract Recompetition	High	Medium	Focus
Rising Interest Rates (Financing Costs)	Low	High	Limited Impact
Economic Recession (Government Stimulus)	Low	Medium	Hedging Effect

:

• VA contracts play an important role in the Health & Civil segment
• Recompetition of high-margin contracts (such as electronic health record systems) may compress profits
• However, the VA’s long-term demand for IT modernization is rigid, and Leidos has advantages as an incumbent

:

• Media reports have exaggerated the situation, and actual contract execution has not been significantly affected
• The Federal Procurement Data System (FPDS) shows that Leidos’ FY2025 contract execution is proceeding normally
• In the long term, government efficiency reforms may instead benefit contractors with technical efficiency advantages[3]

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Valuation Method	Valuation	Implied Return
DCF Base Case	$214.03	+8.9%
DCF Probability-Weighted	$253.17	+28.8%
Analyst Consensus Target	$222.50	+13.2%
Current Price	$196.61	-

: The current price has an approximately 8% discount relative to the DCF base case, reflecting that VA contract risks have been priced in. Long-term investors can initiate or add positions at the current level.

Investor Type	Recommendation
Long-Term Value Investors	The current price is attractive; it is recommended to gradually build positions with a target price range of $222-$253
Traders	Focus on the support range of $186-$198 and resistance level of $205-$210
Risk-Tolerant Investors	Consider adding positions after VA contract risks are fully priced in
Risk-Averse Investors	Wait for clarity on VA contract prospects before making decisions

:

• FY2026 defense budget execution exceeds expectations
• Award of large new defense contracts (e.g., related to the Replicator Initiative)
• Smooth renewal of VA contracts
• Quarterly results exceed expectations (next earnings report: February 10, 2026)

:

• Significant loss of VA contracts
• DoD budget cuts exceed expectations
• Contract cancellations due to government efficiency reforms
• Government spending cuts due to economic recession

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. The core logic is as follows:

1. Controllable Impact
   : Slowing VA contract growth mainly affects the Health & Civil segment (30% of revenue), rather than the core defense business (56%)

2. Structural Tailwind Hedge
   : The FY2026 defense budget tilts toward digital modernization, with a 27% increase in the RDT&E budget, creating growth space for Leidos’ defense IT business

3. Risks Fully Priced In
   : The current 17.89x P/E ratio represents a 28% discount relative to the industry average of 25x, indicating that VA-related risks have been priced in by the market

4. Solid Fundamentals
   : 30.81% ROE, $1.243 billion in free cash flow, and sufficient order backlog

5. Long-Term Growth Logic Remains Intact
   : Long-term trends such as defense IT modernization, cybersecurity, and autonomous systems remain unaffected by policy cycles

: Maintain the “” rating (consistent with Stifel’s “Hold” rating, but further downgrades are not recommended). The current price offers an attractive long-term entry opportunity; it is recommended to gradually build positions in the $186-$190 range.

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The chart above shows:

1. Top Left
   : 2025 Leidos stock price chart, currently in a range-bound consolidation
2. Top Right
   : DCF valuation scenario analysis, with the base case showing 8.9% upside potential
3. Bottom Left
   : Revenue composition analysis, with defense business dominating
4. Bottom Right
   : Government contract risk assessment matrix

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[0] Jinling API - Leidos Real-Time Quotes, Financial Analysis, and DCF Valuation Data (2026-01-07)

[1] Jinling API - Leidos Company Profile and Analyst Ratings (2026-01-07)

[2] SEC.gov - Leidos Holdings Inc. 2024 Form 10-K Annual Report (2025-02-11) https://www.sec.gov/Archives/edgar/data/1336920/000133692025000006/ldos-20250103.htm

[3] GovExec - “DOGE was government contracting’s biggest story of 2025” (2025-12) https://www.govexec.com/management/2025/12/doge-was-government-contractings-biggest-story-2025-and-its-not-close/410427/

[4] PSware - “2026 Aerospace and Defense Industry Outlook” (2025) https://www.psware.com/2026-aerospace-and-defense-industry-outlook/

[5] QuiverQuant - Government Contract News (2025) https://www.quiverquant.com/news/category/contracts_automated

[6] Beehiiv - Leidos Contract Awards Coverage (2025) https://beehiiv-images-production.s3.amazonaws.com/uploads/asset/file/c6e98c78-0830-4a32-a72c-77304f690cf4/43.png

[7] Finviz - Leidos Analyst Ratings and Price Target Changes (2025-12) https://finviz.com/quote.ashx?t=LDOS