Defense contractor Leidos (NYSE: LDOS) fell short of the market’s revenue expectations in Q3 2026 as revenue rose 3.6% year on year to $4.63 billion. The company’s full-year revenue guidance of $18.1 billion at the midpoint came in 1.2% below analysts’ consensus estimates. Its non-GAAP profit of $3.62 per share was 19% above analysts’ consensus estimates.

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"Leidos delivered another quarter of strong financial performance, allowing us to enhance our 2026 guidance for the third consecutive quarter," said Chief Executive Officer Tom Bell. "Our sustained momentum reflects the strength of our focused team, united behind our NorthStar 2030 strategy and committed to delivering on our customers' most critical missions. Looking ahead, we'll continue to execute our strategy with confidence, invest in differentiated capabilities, and deploy capital strategically to accelerate growth and create enduring value."

Revenue growth

A company’s long-term performance is an indicator of its overall quality. Even a poor business can perform well for one or two quarters, but a high-quality one grows for years. Leidos’s revenue grew at a tepid 5.7% annualized rate over the last five years, an underwhelming result compared with the rest of the industrials sector, but there are still things to like about Leidos.

Long-term growth matters most, but within industrials, a half-decade historical view may miss cycles, industry trends or a company capitalizing on catalysts such as a new contract win or a successful product line. Leidos’s recent performance shows its demand has slowed as its annualized revenue growth of 4.6% over the last two years was below its five-year trend. Decelerating revenue growth in the sector warrants caution, as it could signal changing consumer tastes aided by low switching costs.

The company’s backlog, or the value of its outstanding orders that have not yet been executed or delivered, helps explain its revenue dynamics. Leidos’s backlog reached $49.55 billion in the latest quarter and averaged 14.4% year-on-year growth over the last two years. Backlog growth outpaced revenue growth, indicating that the company accumulated more orders than it could fulfill and deferred revenue to the future. This could imply elevated demand for Leidos’s products and services but raises concerns about capacity constraints.

This quarter, Leidos’s revenue grew by 3.6% year on year to $4.63 billion, falling short of Wall Street’s consensus estimates.

Looking ahead, sell-side analysts expect revenue to grow 6.3% over the next 12 months, according to S&P. While this projection suggests its newer products and services will fuel better revenue performance, it is still below the sector average. Still, the company is performing well on other measures of financial health.

Operating margin

Leidos has done a decent job managing its cost base over the last five years. The company has produced an average operating margin of 9.3%, higher than the broader industrials sector.

Looking at the trend in its profitability, Leidos’s operating margin rose by 3.8 percentage points over the last five years, as its revenue growth gave it operating leverage.

This quarter, Leidos generated an operating margin of 11.9%, in line with the same quarter last year. This indicates the company’s overall cost structure has been relatively stable.

Earnings per share

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth. For example, a company could inflate its revenue through excessive spending on advertising and promotions.

Leidos’s EPS grew at a 13.8% compounded annual growth rate over the last five years, higher than its 5.7% annualized revenue growth. This indicates the company became more profitable on a per-share basis as it expanded.

We can take a deeper look into Leidos’s earnings quality to better understand the drivers of its performance. As we mentioned earlier, Leidos’s operating margin was flat this quarter but expanded by 3.8 percentage points over the last five years. On top of that, its share count shrank by 12.6%. These are positive signs for shareholders because improving profitability and share buybacks boost EPS growth relative to revenue growth.

Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business.

For Leidos, its two-year annual EPS growth of 13.9% is similar to its five-year trend, implying strong and stable earnings power.

In Q3, Leidos reported adjusted EPS of $3.62, up from $3.05 in the same quarter last year. The result comfortably beat analysts’ consensus estimates, a positive for shareholders. Over the next 12 months, Wall Street expects Leidos’s full-year EPS to shrink by 3.7% from $12.77 to $12.30, according to S&P.

Key takeaways from Leidos’s Q3 results

Leidos delivered a mixed Q3: EPS beat analysts’ consensus estimates, and full-year EPS guidance also topped Wall Street’s consensus. But revenue missed expectations, and full-year revenue guidance fell slightly short of consensus. The market appeared to be hoping for more, with shares falling 3.9% to $138.47 immediately after the report.

For investors considering Leidos, valuation, business quality and the latest earnings all factor into the decision. For more on Leidos, read the full research report here (it’s free).