Why Is Leidos (LDOS) Stock Rocketing Higher Today

What Happened?

Shares of defense contractor Leidos (NYSE:LDOS) jumped 6.2% in the morning session after the company reported strong third-quarter financial results that beat expectations and raised its full-year earnings guidance. 

The defense and IT services provider posted revenue of $4.47 billion, a 6.7% increase year-over-year that surpassed analyst estimates. Its adjusted earnings per share of $3.05 also came in 12.3% higher than Wall Street's consensus. The strong performance was further supported by an adjusted EBITDA of $616 million, which also beat expectations. Looking ahead, Leidos lifted its full-year adjusted earnings per share guidance to a midpoint of $11.60, a 10% increase. The company's backlog also grew to $47.66 billion, up 4.7% from the previous year, indicating a healthy pipeline of future work.

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What Is The Market Telling Us

Leidos’s shares are not very volatile and have only had 4 moves greater than 5% over the last year. In that context, today’s move indicates the market considers this news meaningful, although it might not be something that would fundamentally change its perception of the business.

The biggest move we wrote about over the last year was 10 months ago when the stock dropped 7.5% on the news that peer, CACI, reported fourth-quarter earnings results, with markets increasingly worried that new cost-cutting initiatives by the US government would affect Defense contracts. 

Although CACI reported a strong quarter with revenue, EBITDA, EPS ahead of Wall Street's expectations as well as a statement that they're well on their way to meet the three-year financial targets unveiled during the November 2024 Investor Day, the market became fearful of the impact of DOGE during the earnings call Q&A session. DOGE or the Dept of Government Efficiency was recently established by President Donald Trump as a result of his frustration with government bloat and inefficiency. A primary objective is to streamline federal operations and significantly reduce government spending, with a target of cutting up to $2 trillion over the next decade. 

For example, DOGE plans to reassess and renegotiate existing Department of Defense contracts to achieve cost savings, and this could lead to reduced contract values or more stringent terms for defense contractors such as CACI and others. Additionally, there will likely be efforts to reduce the size of the federal workforce, which may result in fewer government personnel overseeing and managing defense contracts. This could slow down procurement processes and delay project approvals, impacting contractors' operations. Defense contractor stocks have seen multiple compression since President Trump first introduced DOGE, and yesterday's CACI earnings call had multiple questions related to the topic that seemed to make the market more fearful that DOGE will indeed be a headwind to CACI and peers.

Leidos is up 43.3% since the beginning of the year, and at $205.20 per share, has set a new 52-week high. Investors who bought $1,000 worth of Leidos’s shares 5 years ago would now be looking at an investment worth $2,224.

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