What happened

Shares of Leidos Holdings (NYSE:LDOS) was trading down about 10% on Tuesday following the government IT specialist's earnings release. The quarter was mixed, but the company's outlook for 2021 failed to impress on a difficult day for stocks.

So what

Leidos said before markets opened that it earned $1.63 per share in the quarter on revenue of $3.25 billion. The earnings number beat estimates by two cents per share, but revenue came in shy of the $3.39 billion consensus. Revenue was up 10.1% year over year, but down slightly on an organic basis.

The company ended the period with a record backlog of $31.9 billion in orders, and has a healthy 1.4 times book-to-bill ratio -- a measure of how much new business is coming in compared to how much is billed -- over the past 12 months.

The Sea Hunter turns on a river.

Leidos' autonomous Sea Hunter. Image source: U.S. Navy photo by John F. Williams.

Leidos also said it intends to acquire privately held Gibbs & Cox for $380 million, adding engineering talent and greater exposure to the maritime market. Leidos was one of the driving forces behind the Sea Hunter, a U.S. Navy drone ship that in 2019 sailed from San Diego to Hawaii and back with little human intervention.

The results come less than a week after short-seller Spruce Point Capital Management issued a report claiming mismanagement and potential fraud at Leidos. The short report did little to move the stock, but the earnings report a week later is causing a sell-off.

LDOS Chart

LDOS data by YCharts

Now what

Leidos' initial 2021 guidance calls for $13.7 billion to $14.1 billion in sales, and earnings of $6.15 to $6.45 per share. The earnings range is below the Street's $6.47 per share forecast, and the midpoint of revenue guidance is below the $13.96 billion estimate, which is likely fueling a lot of the sell-off.

I see nothing in the report to suggest the sky is falling, but following two large acquisitions in 2020, Leidos is clearly a company in transition during what is a challenging defense procurement climate. Leidos remains a company with great potential, but the quarterly report makes it clear it could take time for Leidos to reach that potential.

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