Leidos: The Defence Contractor Quietly Buying the AI Power Grid

Leidos Holdings ($LDOS) is down 43% YTD and 34.7% over the past twelve months, currently trading at $101.76. During this period the company beat Q1 2026 earnings, raised FY guidance to $18-$18.4B (+$500M), and won over $4.6B+ in new contracts, including a $2.7B Army hypersonic weapons programme.

The stock fell because the Defence Health Agency signalled it plans to transition away from Leidos as lead systems integrator for MHS GENESIS, the US military's electronic health record programme.

What Leidos Does

Leidos is a science and technology company providing services and solutions for defence, intelligence, civil, and health markets. They employ 47,000 people, of whom ~53% hold US security clearances.

Leidos operates across four segments: National Security & Digital, covering intelligence systems, cybersecurity, and digital modernisation for defence and intelligence agencies. Health & Civil, covering federal health IT, medical disability examinations, and energy infrastructure. Defence Systems, covering weapons systems, air and missile defence, hypersonic programmes, maritime and aerospace. Commercial & International, covering power grid engineering and security screening systems.

The US government accounts for the vast majority of revenue; contracts range from cost-plus development work to fixed-price production programmes. The $48.4B backlog at the end of Q1 2026 represents ~2.8 years of revenue at current run rates.

Leidos does not sell products to consumers; it is embedded so deeply in US government infrastructure that replacing it as a vendor requires years of transition planning. Getting US security clearance takes between 6 months and 2 years to obtain; having a workforce of 25,000+ people holding active clearances takes decades.

The Q1 2026 Numbers

Per the Q1 2026 10-Q filed May 5th: Revenue $4.4B (+4% YoY). Operating income $508M (-4% YoY), reflecting $35M in ENTRUST acquisition and integration costs (similar to FIS and the TSYS integration). Net income $335M (-8% YoY), for the same reason. Strip the one-time costs out and non-GAAP diluted EPS was $3.13 (+5% YoY).

GAAP margins compressed ~1% YoY, again due to ENTRUST acquisition costs. Non-GAAP operating margin expanded ~1% YoY for the same reason. The underlying business is more profitable than a year ago. Adjusted EBITDA margin held at 14%.

FY 2026 guidance raised: revenue $18-$18.4B (+$500M), mid-13% adjusted EBITDA margins, non-GAAP diluted EPS $12.10-$12.50, ~$1.75B operating cash flow.

Balance sheet: total assets $15.4B, total debt $6.3B, cash $457M, backlog $48.4B including $9.7B funded. Quarterly dividend $0.43 per share, payable June 30th.

The ENTRUST Acquisition

The debt increase QoQ from $4.6B to $6.3B reflects the $2.4B all-cash acquisition of ENTRUST Solutions Group, completed March 30th 2026.

ENTRUST is a power grid engineering firm with 3,100 specialists in electric grid engineering and natural gas infrastructure. The acquisition doubles Leidos's energy footprint and is the centrepiece of Thomas Bell's (CEO) NorthStar 2030 strategy, a five-pillar growth plan launched in 2024 covering Space and Maritime, Energy Infrastructure, Digital Modernisation and Cyber, Mission Software, and Managed Health Services.

The strategic rationale is that US utilities are projected to invest $1 trillion over the next decade in grid modernisation. AI data centres are projected to consume 12% of total US electricity by 2028. Grid capacity has replaced real estate as the primary bottleneck for hyperscalers (Amazon, Meta, Google, etc.) in building AI infrastructure. ENTRUST positions Leidos as the critical intermediary between utilities, hyperscalers, and the federal government on grid reliability.

After just over one month post-close, the CEO raised FY guidance by $500M due to ENTRUST. He said during the Q1 2026 earnings call: "The raises to revenue, earnings and cash guidance primarily reflect our ENTRUST acquisition. We now expect the deal to be accretive to non-GAAP EPS and cash in 2026 with substantially more accretion as deal synergies are realized in 2027 and beyond." The ENTRUST opportunity pipeline expanded to $10B post-close (+230% from pre-acquisition levels); the deal is performing ahead of expectations.

ENTRUST is not the only energy investment Leidos is making, they are participating in DARPA's ExCURSion programme (Expeditionary Carbon Utilization for Energy Resilience and Stabilization) developing a closed, rechargeable military energy system that produces fuel on demand from carbon dioxide and water. Leidos's own press release flags: the ENTRUST acquisition and ExCURSion participation are part of the same energy infrastructure strategy. The grid engineering is the commercial layer and the DARPA contract is the defence layer.

$4.6B+ in New Contracts

Between April 23rd and May 21st 2026 (while the stock declined ~15%), Leidos won the following contracts, worth over $4.6B:

$617M Army air defence launchers on April 23rd: Additional launchers for the IFPC Inc 2 system, bringing total IFPC production contracts to nearly $1.2B.

$456M Military OneSource on April 29th: Continuing well-being services for 4.7M Department of War service members and their families.

$869M Army MACRO II contract on April 30th: Designing, building, and integrating AI-driven systems that accelerate military decision-making across electromagnetic, land, sea, air, space and cyber domains.

$2.7B Army hypersonic weapons contract on May 12th: Advancing hypersonic weapons from prototype development into production, unifying the Thermal Protection Shield and Common Hypersonic Glide Body programmes for both Army and Navy.

State Department Evolve IT modernisation on May 21st: Four functional category awards under the State Department's Evolve contract, an IDIQ vehicle with a $10B ceiling shared across multiple contractors over seven years. IDIQ contracts set a maximum spend ceiling but don't guarantee revenue, task orders are placed as work arises. Leidos was selected across four categories: cloud and data centre services, application development, network and telecommunications, and customer support across the State Department's global network of embassies and consulates.

DOGE Impact Quantified and Minimal

Leidos lost less than $2M in DOGE-related contract cancellations. For reference, Accenture lost $193M, Deloitte lost $473M and IBM lost $40M. DOGE's formal charter expires July 4th 2026, and it has largely wound down as an independent entity, though its workforce reduction and deregulation policies continue. Mission-critical defence work was never DOGE's target; Leidos was left unaffected by these cuts.

The DHA EHR Transition

The Defence Health Agency (DHA) responsible for healthcare for US military personnel and their families, published a specific plan to transition away from Leidos as lead systems integrator for MHS GENESIS, the military's electronic health record.

MHS GENESIS is the largest electronic health record (EHR) implementation in US history, deployed across 140+ military treatment facilities globally. Leidos won the original 10-year, $4.3B contract in 2015 (expanded to $5.5B) to deploy the system from scratch. Full deployment was achieved in March 2026, on schedule. In October 2025, before deployment was complete, DHA awarded Leidos a further $1.13B sole-source contract to migrate MHS GENESIS from on-premise servers to Oracle's cloud infrastructure. DHA's own contracting notice explained "industry feedback underscored the program management office's concerns about the high-risk nature of transitioning the systems integrator role to a different contractor immediately following full deployment." With deployment now complete and the cloud migration underway, DHA has concluded it no longer needs a single lead integrator to manage the sustainment phase. The five underlying technology vendors (Oracle Health, Henry Schein, Philips, Amwell, and Solventum) will now contract directly with DHA, with them taking on integration responsibility itself.

DHA has published a specific transition timeline, with Philips and Amwell transitioning away from Leidos's management by the end of July 2026, Oracle Health by November 2026 and Henry Schein and Solventum by July 2027. DHA is planning a further 12-month extension with Leidos to manage the transition itself (the value of this extension has not been publicly disclosed). Leidos will be paid to hand over a system it built and deployed.

Leidos' Health & Civil segment generates ~$3.8-4B annually, ~22% of total revenue. MHS GENESIS is the flagship programme in that segment; the 10-Q does not disclose MHS GENESIS as a standalone revenue line. Industry estimates place the programme at $1-2B of annual Health segment revenue, ~5-11% of total company revenue at $18-$18.4B FY2026 guidance.

The DHA EHR revenue phases out over 13 months, while new contract awards typically take 12-24 months to reach full revenue run rate; there is potential for a timing gap in the Health segment specifically. On a total company basis, the $4.6B+ in contract awards across April-May alone covers the estimated $1-2B annual DHA EHR exposure. The market's 43% YTD decline implies the entire $18B business is impaired; the DHA transition is a Health segment risk, not a company-wide risk.

What Else Leidos is Doing

While recent headline coverage has been focused on the DHA contract, Leidos has had seven significant developments across April, May and June 2026.

Low-Cost Containerized Munitions framework: In May, Leidos committed its own capital to build an initial 3,000 AGM-190A Low-Cost Containerized Munitions under a Department of War framework agreement, expanding production facilities in Huntsville, Alabama and McEwen, Tennessee. Leidos is self-funding the development to secure the production contract.

Maritime Mission Edge: Leidos deployed its zero-trust architecture hosting platform at NIWC Pacific in June 2026 ahead of RIMPAC (the world's largest international maritime exercise). Zero-trust means every user and device accessing the system is continuously verified rather than automatically trusted. The platform standardises software hosting across deployed naval forces and enables rapid software delivery without manual installation.

HeadWay Mission OS and DataOS: Leidos partnered with The Modern Data Company to embed DataOS into its HeadWay Mission OS, creating an AI-native data layer that connects fragmented federal agency data across cloud and on-premise systems without requiring infrastructure overhauls. Federal agencies have massive fragmented data problems across legacy systems; this directly addresses the primary barrier to AI adoption in government.

Joint Management Tool: Leidos deployed a cloud-based satellite communications management platform with DISA and US Space Command in June, providing real-time visibility into SATCOM resources across the Department of War.

Leidos and Analogic Joint Venture: Combining advanced airport, border, and critical infrastructure detection systems with Leidos's Security Enterprise Solutions division. Leidos will contribute ~1,500 employees and $625M in projected 2026 security screening revenue to the new entity, retaining ~40% minority ownership. The transaction closes in H2 2026, pending Hart-Scott-Rodino antitrust clearance and a standard German regulatory review.

Havoc Autonomous Vessel Partnership: Leidos is partnering with Havoc to integrate collaborative autonomy across unmanned surface and aerial platforms, combining Havoc's software with Leidos's Autonomous Vessel Architecture (LAVA). Beginning with the Sea Archer vessel, a joint operational validation is planned for Q4 2026.

Private Equity Partnership: Leidos committed $100M to a fund that invests in early-stage federal technology companies. The goal is to get in early on the companies building the next generation of government technology before they become large enough to be acquired by competitors or disrupt Leidos's own contracts.

The Risks

The DHA EHR revenue exposure is real and currently unquantified from public filings. If MHS GENESIS represents $2B or more of annual Health segment revenue, the 13-month transition has a material impact on segment trajectory. Management has not provided a specific figure; the Q2 2026 earnings (expected early August) is when we will get the full impact.

The ENTRUST acquisition added $1.7B in debt in a single quarter. Total debt at $6.3B against $457M in cash is a real balance sheet consideration in a higher-for-longer rate environment, with the Fed projecting rates at 3.8% through 2027. Interest expense of $55M in Q1 reflects a borrowing cost that runs in parallel to the ENTRUST integration. $320M in current debt is due within 12 months, up from $20M at year end.

Federal budget uncertainty is the main risk, but the trajectory of spending in Leidos's core markets moves strongly in one direction. US defence spending has grown from $738B in FY2021 to $961B in FY2026, +30% in five years. The One Big Beautiful Bill Act is adding a further $152B in Pentagon spending for FY2025-2029, pushing national defence spending beyond $1T for the first time. Hypersonic weapons, missile defence, space-based sensing, and AI-driven military systems (the contracts Leidos is winning) are receiving the largest proportional increases.

My View

Leidos beat Q1 earnings and raised FY guidance by $500M. It has won over $4.6B+ in contracts, made seven significant developments between April and June, and completed a $2.4B acquisition positioning it in the AI grid infrastructure market, all while maintaining its dividend.

The DHA EHR transition is the big headline right now, but the timeline is 13 months. The revenue impact is unknown, but almost certainly less than a 43% decline implies on a business with $49B in backlog and $1.75B in guided operating cash flow. On a total-company basis the $4.6B in new contracts dwarfs the estimated $1-2B annual DHA EHR exposure.

The ENTRUST acquisition connects Leidos directly to the AI infrastructure buildout, through the physical electricity grid that every data centre depends on. Leidos now has 5,500+ energy professionals serving that market.

The closest comparable company, Booz Allen reported declining revenue at lower margins and trades at approximately 14x forward PE. Leidos is growing faster, has better margins, and trades at 9.8x. The DHA EHR transition explains some of that discount, but not all of it.

For me this is a buy; I have opened a position of 170 shares at $101.41 average. Q2 2026 earnings (expected on August 5th) is the next data point, and I will be watching three things specifically: management's quantification of the MHS GENESIS revenue exposure, Health segment trajectory after the transition announcement and the future contract pipeline further offsetting the DHA EHR figure. If the revenue impact is materially smaller than what the stock decline implies, the re-rating happens quickly.

Ticker Thoughts is independent analysis and not financial advice. Current position at time of publication: 170 shares at $101.41 average. All open and closed positions are detailed on the positions page.