Shares of Perspecta (NYSE:PRSP) fell more than 16% on Thursday morning after the government IT contractor lost out on a major contract. The loss is a significant blow to Perspecta that is going to take time to recover from.
On Wednesday after markets closed, the U.S. Navy announced it had awarded Leidos Holdings (NYSE:LDOS) a $7.73 billion contract to modernize and maintain computer networks for the Navy and Marine Corps. Leidos beat out Perspecta, the incumbent IT vendor for the Navy, as well as a bid from the IT arm of defense titan General Dynamics.
The so-called NGEN-R contract is a significant piece of Perspecta's overall business, representing an estimated 15% of total sales and a similar portion of its earnings.
Perspecta was created in June 2018 via a three-way merger among Vencore, KeyPoint Government Solutions, and the public sector business DXC Technology. Concerns about the NGEN-R recompete have weighed on the company's shares since its inception, although there was reason to hope the company would get at least a portion of the contract renewed.
There's no way to sugarcoat it: This decision is a major blow for Perspecta that will take the company a significant amount of time to backfill. In its last earnings release in November, the company boasted quarterly bookings more than double what it billed, as well as a $75 billion pipeline of potential contracts, but as this Navy decision shows, it is a competitive marketplace.
Expect Perspecta to protest the award, and while it is too soon to say whether the company has a reasonable chance to get the decision overturned, the protest should at least delay the transition and give management time to soften the blow.
Perspecta is scheduled to release quarterly earnings on Feb. 12, and management should have an idea of how to proceed next by then. Despite the contract loss, Perspecta still has a solid business with multiple government agency relationships. If Perspecta shares keep falling, the company could be an attractive takeover target in a consolidating industry.
Perspecta can recover from this loss, but it is going to take time.