Spruce Point Capital Management, an investment firm best known for its short-selling recommendations, on Tuesday warned that it sees mismanagement and potential fraud in Leidos Holdings (LDOS 1.04%) and forecast up to 60% downside risk to the company's shares.
Leidos, a government-services and IT provider with a $15 billion market cap, "wasted $1 billion" last year when it acquired the airport security business of L3Harris Technologies (LHX 1.14%), according to Spruce Point. The firm also notes that Leidos CEO Roger Krone once worked for Boeing, a company that has had its share of black eyes in recent years, and said Leidos "is concealing numerous product defects from investors."
Leidos shares traded down about 3% at 1 p.m. EST on Tuesday following the release of the report.
The company's timing in the L3Harris deal was regrettable; it was done just before the aviation industry experienced a dramatic drop-off in passenger traffic due to the pandemic. Spruce Point noted Leidos' forecast of double-digit growth in the business and 15% margins, adding that following its investigation, "Spruce Point believes none of these claims are possible."
The report does not accuse Krone of fraud, but does say that under his leadership, "Leidos is concealing numerous product defects from investors, including faulty explosive detection systems at airports, ports, and borders."
Leidos had no immediate comment, but the company is expected to speak at a Wall Street conference on Wednesday.
Currently no Wall Street bank has a sell rating on Leidos, but Spruce Point founder Ben Axler, in a statement announcing the report, attributes the lack of scrutiny to "the fundamental flaws" of the research model.