Leidos CEO Says He Can't Bound VA Exam Contract Risk, Argues Stock Is Cheap Even Without It
CFO Chris said 2027 will not be a bottom-line growth year, while the CEO pointed to a sum-of-the-parts value.
Leidos CEO Tom Bell said on the company's earnings call Tuesday that he cannot put boundaries on the outcome of the Veterans Benefits Administration disability-exam recompete, though he argued the stock is valued below the rest of the business even if that work were zeroed out. CFO Chris said 2027 "is not a bottom line growth here for the company," even as the quarter produced $4.63 billion in revenue, up 4%.
No bounds on the VA outcome
Leidos, which provides science, engineering and technology services mostly to government agencies, has watched its VA disability-exam work shrink under contract changes. A Goldman Sachs analyst asked Bell to frame best and worst cases for health revenue and margins. Bell answered: "no, I'm not able to bound it."
He said the request for proposals is still a draft and the customer is expected to decide around April or May, so the boundary conditions would not be clear until about halfway through 2027. Management expects the final RFP later this month and says it is highly likely existing contracts are extended through the first half of 2027, ahead of a planned July 1, 2027 start for the new contract.
The draft envisions six service groups, each with two to four vendors. Two vendors per group must be able to serve veterans within 30 days, Bell said, while new entrants have a year. Chris added that the draft contemplates best-performing vendors getting a disproportionate share of work, which he called an upside case.
Cheap even at zero, Bell argues
Bell said a sum-of-the-parts analysis shows the current valuation sits "way below the sum of the parts" of the rest of Leidos even if the VBA business is zeroed out. He said the market has somewhat overburdened the stock with fear of the unknown, and he thinks the odds that the market leader is shut out entirely are "pretty low." The company's market value was $18.1 billion on Tuesday morning.
Pressed for 2026 earnings without VBA, Chris said that detail is below the level the company discloses. He added that an upside case exists in which Leidos ends up with more work share than today, but it is too early to commit to that.
2027 earnings and the health margin
Earlier, TD Securities' Gautam Khanna asked whether earnings would grow in 2027 and 2028. Chris said the implied fourth quarter is the jumping-off point, that 2027 brings accelerating top-line growth elsewhere but not bottom-line growth, and that it is way too early to say there is no bottom-line story beyond the VBA transition.
On health, Chris guided fourth-quarter segment margins to the high teens and said that exit rate is a good place to model the first half of next year, while the current contract continues. Excluding the health segment, revenue grew 9% and non-GAAP operating income grew 48%.
Total backlog, which Bell called a more important measure than the episodic quarterly book-to-bill ratio, reached $49.6 billion, up 4% from a year earlier. Management will give more 2027 detail in February.
Management said it will be able to say more about the back half of 2027 once the final RFP lands, with fuller 2027 detail promised in February.
Sources
- Document — sec.gov
- Leidos stock falls revenue outlook disappoints (LDOS:NYSE) | Seeking Alpha — seekingalpha.com
- Leidos (LDOS) Tops Q3 Earnings Estimates — Yahoo Finance
- Leidos raises quarterly dividend by 4.7% to $0.45/share (NYSE:LDOS) | Seeking Alpha — seekingalpha.com
- Why the Market Dipped But Leidos (LDOS) Gained Today — Yahoo Finance
