What happened

On a day when the Dow Jones Industrial Average and S&P 500 were rising, shares of Leidos Holdings (LDOS 0.93%), a leading information technology company, headed in the other direction. The stock closed 10.9% lower today, having recovered slightly from being down as much as 12% earlier in the day.

Investors, evidently, aren't pleased with the company's second-quarter 2021 earnings report, which was released before the market opened.

Two workers analyze a financial chart in an office.

Image source: Getty Images.

So what

Reporting revenue of $3.4 billion, Leidos met analysts' Q2 2021 expectations on the top line. It was the bottom of the income statement, however, that was a greater concern for investors. Wall Street had been expecting the company to report adjusted earnings per share of $1.58, but it came up short, booking adjusted EPS of $1.52. It wasn't only the earnings shortcoming, though, that troubled investors as the company recognized compressed margins in the quarter. For one, Leidos reported a 7.8% operating margin for the recently completed quarter -- slimmer than the 8.5% operating margin that it generated during the same quarter last year. Likewise, the company reported an adjusted EBITDA margin of 10.4% for Q2 2021, representing a narrowing of 140 basis points from the 11.8% that it had in Q2 2020.

The cash flow statement also provided a source of concern for shareholders. Leidos reported operating cash flow of $17 million, a significant falloff from the $422 million it generated in Q2 2020. Of greater note, though, the company reported negative free cash flow of $4 million, whereas it had generated positive free cash flow of $376 million during the same period in 2020.

Now what

While investors weren't pleased with the company's Q2 2021 performance, it seems that the market's reaction is overblown today. Leidos' quarterly revenue, for example, was a company record, and the future appears to be bright as the company reported its 14th consecutive quarter of backlog growth, standing now at $33.5 billion.

For investors interested in Leidos Holdings, the stock's decline today presents a good buying opportunity. Shares are currently valued at 12.8 times operating cash flow -- a discount to the five-year average multiple of 13.3.