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Why Shares of Perspecta Fell in February

By Lou Whiteman - Mar 2, 2020 at 4:05PM

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A big contract renewal didn't go the company's way.

What happened

Shares of Perspecta (PRSP) fell 11% in February, according to data provided by S&P Global Market Intelligence, after the government IT contractor lost out on a major contract. The shares actually lost more than 16% after the contract was announced, but recovered somewhat as February went on.

So what

The U.S. Navy announced on Feb. 5 that it had awarded Leidos Holdings a $7.73 billion contract to modernize and maintain computer networks for the Navy and Marine Corps. In the "NGEN-R" competition, Leidos beat out Perspecta -- the incumbent IT vendor for the Navy -- as well as bids from other defense contractors.

An IT technician runs a server diagnosis on a laptop.

Image source: Getty Images.

The contract was a big deal for Perspecta, representing more than 15% of total annual revenue and a significant portion of its earnings. Perspecta does have the option to protest the award, and boasts a significant pipeline of $80 billion in potential bids. But unless there's a dramatic turn of events, the company will have to scramble to win new business just to backfill the lost revenue.

Now what

The contract award came just a week before Perspecta's previously scheduled quarterly earnings release, and management used the release to make a case for how the company can weather the storm and move on after losing the NGEN-R competition. CEO Mac Curtis told investors that the decision "is a setback to our plans, no question," but added "we are confident we can grow our business."

Even without a protest, the contract is set to run into Perspecta's fiscal 2021, giving the company ample time to make up for what will be lost. The company's bookings in the recently completed quarter came in at an impressive 1.42 times what was billed, and only 8% of current business comes up for renewal in the next three years, freeing management to focus on winning new business instead of defending other existing contracts.

While an NGEN win would have provided the company with substantial revenue, management knew going in that it would be a competitive deal with razor-thin margins, and was not counting on it to fuel earnings growth.

Without doubt, the decision was a setback, but Perspecta remains an attractive company with some attractive contracts in a consolidating industry. There's still plenty of reason to be optimistic about Perspecta, but the company's near-term road looks a lot rockier now due to the lost Navy contract.

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