Why Leidos Holdings, Inc. Shares Plunged

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Leidos Holdings, Inc.  (NYSE: LDOS  )  -- or formerly Science Applications International -- fell more than 17% during Tuesday's intraday trading after the national security, health, and engineering solutions specialist released disappointing preliminary third-quarter results and lowered its full-year guidance.

So what: Quarterly revenues are expected to fall 15% year over year to $1.42 billion, which is well short of analysts' expectations for sales of $1.45 billion. This, in turn, should translate to a $7 million operating loss, compared with operating income of $101 million in the same year-ago period.

As a result, Leidos lowered its fiscal 2014 revenue guidance to a range of $5.65 billion to $5.8 billion, down from the previous range of $5.85 billion to $6.1 billion. In addition, Leidos now expects diluted earnings per share from continuing operations of $0.85 to $1.10, compared to the previous range of $1.80 to $2.04.

By comparison, analysts were looking for fiscal 2014 earnings of $1.89 per share on sales of $5.93 billion.

Now what: Leidos blamed the decrease in revenue both on the temporary government shutdown and "market conditions more challenging than previously expected."

What's more, the company stated its operating loss is primarily due to a number of exceptional expenses, including a $42 million bad debt expense related to its Plainfield and Gradient energy construction projects, separation and restructuring expenses of $25 million related to the spin-off of SAIC's services business, a $19 million asset impairment charge from two commercial health acquisitions, and $5 million in reserves for "discrete regulatory and legal matters."

As it stands, however, the stock does look cheap trading around 8.3 times last year's earnings and roughly 13 times next year's estimates. What's more, consider the fact Leidos offers a solid 2.6% dividend to reward shareholders for their patience while Leidos' long-term plans come to fruition. While I wouldn't go all-in even at today's prices, I think this pullback could be a great chance for patient investors to open a small initial position.

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  • Report this Comment On December 03, 2013, at 4:30 PM, TrackMagicFormul wrote:

    OK, you say Leidos now expects fiscal 2014 diluted earnings per share from continuing operations of $0.85 to $1.10, yet is cheap as the stock trades for roughly 13 times next year's estimates.

    $1.1 * 13 is $14.30, but the stock is $41.71 a share!

    Is your math wrong, or am I missing something? Please clarify, thanks.

  • Report this Comment On December 04, 2013, at 11:22 AM, TMFSymington wrote:

    @TrackMagicFormul, note that's "fiscal" 2014, not calendar year 2014. Next year's results will be Leidos' fiscal 2015.

    Fool on!

    Steve

  • Report this Comment On December 22, 2013, at 6:29 AM, sailbum wrote:

    One thing that always gets a little confusing with SAIC/LDOS is that their fiscal year ends at the end of January. This means that FY 2014 numbers are for the period of 2/1/13 thru 1/31/14. It is odd because the year is just getting started from a CY perspective yet their FY is ending. It was confusing when I worked there and still is to this day, particularly when you are reading an article that is talking about the projected earnings for next FY (their FY15 projected earnings) with their current FY (FY14) coming to a close in about a month.

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