Leidos Holdings, a major U.S. defense and technology contractor, delivered better-than-expected second-quarter results, but RBC Capital Markets believes the market is still not giving the company enough credit for its fastest-growing businesses. The investment bank maintained its outperform rating on the stock while trimming its price target to $170 from $180, a modest adjustment that reflects a nuanced view of the company's future.
The company reported adjusted earnings of $3.26 per share for the quarter, beating analyst expectations, and revenue grew 7% year-over-year. Much of that growth came from the Homeland segment, which includes cybersecurity, border security, and other federal civilian work. That strength, RBC argues, is being overshadowed by concerns about Leidos' large health business, which faces tougher year-over-year comparisons in 2027.
Why the market is focused on health
Leidos is one of the largest IT services providers to the U.S. government, with a portfolio that spans defense, intelligence, health, and civilian markets. Its health business, which provides technology and data services to agencies like the Department of Veterans Affairs and the Centers for Medicare & Medicaid Services, is a significant revenue driver. But that segment is expected to face more difficult comparisons in 2027, as some large contracts roll off or mature.
RBC's view is that investors have been fixated on that upcoming slowdown, treating it as a reason to be cautious about the stock. The bank, however, thinks this focus is misplaced. If more of Leidos' growth comes from defense and homeland programs, the overall business could be seen as more durable, with a better mix of high-priority government spending.
Defense and homeland security budgets have been a bright spot in recent years, even as other parts of federal spending face scrutiny. Leidos' work in areas like missile defense, intelligence analysis, and border technology is tied to long-term national security priorities, which tend to be more stable than discretionary programs.
What the price target cut means
RBC's decision to lower its price target to $170 from $180 is not a downgrade. The bank kept its outperform rating, which means it still expects the stock to do better than the broader market. The reduction likely reflects a more conservative view on the health business or a slightly lower valuation multiple, but the core thesis remains intact: the market is underpricing Leidos' defense and homeland growth.
For everyday investors, the distinction between a price target cut and a rating change is important. A price target is just a projection of where the stock might go over the next 12 months, and it can change for many reasons, including shifts in the overall market or a company's mix of business. An outperform rating, on the other hand, is a clear signal that the analyst still sees upside.
Leidos' stock has been a steady performer, and the company's backlog of government contracts provides a degree of visibility that many commercial tech firms lack. But like any stock, it carries risks. Government spending can be unpredictable, and a slowdown in health-related work could weigh on growth in the coming years.
What it means for investors
For investors, the key takeaway is that Leidos is a company with multiple growth engines, and the market may be overemphasizing one that is set to slow. If the defense and homeland segments continue to deliver, the stock could re-rate higher as investors recognize the durability of that revenue.
That said, RBC's price target cut is a reminder that even bullish analysts are not ignoring the health business headwinds. The company's ability to offset those with faster-growing areas will be critical in the next few quarters.
Leidos is not alone in facing this kind of mixed picture. Other government contractors and tech services firms have seen similar dynamics, where one segment shines while another faces near-term pressure. Investors should look at the whole picture, not just the headline numbers.
For those interested in the broader theme of government IT spending, Leidos is a bellwether. Its results often reflect the health of federal technology budgets, and its stock moves can signal how investors are feeling about the sector. The company's next earnings report will be closely watched for signs that defense and homeland growth is accelerating enough to offset the health slowdown.
In the meantime, RBC's stance suggests that patient investors might find value in a company that is growing revenue at a solid clip, beating expectations, and trading at a reasonable valuation. But as always, it's important to do your own research and consider how a stock fits into your overall portfolio.
