Over the past six months, Leidos’s shares (currently trading at $134.55) have posted a disappointing 12.8% loss while the S&P 500 was flat. This might have investors contemplating their next move.

Is there a buying opportunity in Leidos, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.

Even though the stock has become cheaper, we're swiping left on Leidos for now. Here are three reasons why LDOS doesn't excite us 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 $43.55 billion in the latest quarter, and over the last two years, its year-on-year growth averaged 5.3%. 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 7.6% annualized growth for the past two years. This projection doesn't excite us and indicates its products and services will face some demand challenges.

3. Free Cash Flow Margin Dropping

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

As you can see below, Leidos’s margin dropped by 1.9 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. Leidos’s free cash flow margin for the trailing 12 months was 7.5%.

Final Judgment

Leidos isn’t a terrible business, but it doesn’t pass our bar. Following the recent decline, the stock trades at 12.6× forward price-to-earnings (or $134.55 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're fairly confident there are better investments elsewhere. Let us point you toward one of our top software and edge computing picks.

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