We came across a bullish thesis on Amentum Holdings, Inc. (AMTM) on Substack by Cornerstone Value. In this article, we will summarize the bulls’ thesis on AMTM. Amentum Holdings, Inc. (AMTM)’s share was trading at $19.80 as of Feb 14th. AMTM’s forward P/E was 9.25 according to Yahoo Finance.
A close-up of an antenna, its intricate designs a testament to the company’s expertise in space infrastructure.
Amentum, a newly formed government services contractor, has become an attractive investment opportunity following a significant decline in its stock price. Created through the spin-off of Jacobs Engineering’s government services units and merged with the Legacy Amentum platform, the company has experienced a 40% drop in its stock value, largely due to negative headlines and concerns over the Trump administration’s Department of Government Efficiency (DOGE). However, this has led to Amentum now trading at a significant discount relative to its peers, presenting a compelling value opportunity for long-term investors.
Amentum provides mission-critical services to the U.S. Department of Defense (DoD) and civilian agencies, offering base operations, military training, nuclear waste management, and counterspace services. The company has a diversified portfolio with a $45 billion backlog across 80 countries and holds prime contracts with all major government agencies. These contracts, structured as cost-plus or time-and-materials agreements, offer a stable and profitable revenue base. However, Amentum’s stock has been impacted by its high debt profile, with a 4.0x net debt-to-EBITDA ratio, and its reliance on lower-margin contracts, such as base operations and military training.
Despite these challenges, Amentum’s management, led by CEO John Heller and Executive Chairman Steven Demetriou, is executing a multi-year strategy aimed at unlocking shareholder value. This strategy focuses on deleveraging the company, aiming to reduce the debt ratio to below 3.0x within the next 24 months, which is expected to increase the company’s free cash flow yield to over 12% by 2026. Additionally, Amentum plans to divest lower-margin, commoditized contracts, transitioning towards higher-margin, differentiated opportunities like IT services, specialized environmental engineering, and defense consulting. This shift will improve the company’s valuation, aligning Amentum with the types of contracts that investors prefer.
Steven Demetriou’s leadership provides confidence in Amentum’s future. Under his previous tenure at Jacobs Engineering, he successfully executed a series of transformative acquisitions and divestitures that resulted in a 200% increase in the company’s stock price from 2016 to 2023. Now, Demetriou is expected to bring a similar strategy to Amentum, driving the company toward strong growth and a potential stock re-rating.
Amentum’s financials and strategic roadmap suggest significant upside potential. In a base case scenario, the company could reach a stock price of $47 by FY29, offering an 18% IRR, with a conservative exit multiple of 10x EV/EBITDA. In a more optimistic bull case, higher EBITDA margins and favorable market sentiment could push the stock to $70 per share, representing a 29% IRR. Risks include potential government spending cuts and execution risks related to its leverage and revenue transition. However, Amentum’s strong cash flow, asset-light model, and resilience make it well-positioned for long-term value creation, making it an attractive investment with limited downside risk.
Amentum Holdings, Inc. (AMTM) is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 28 hedge fund portfolios held AMTM at the end of the third quarter which was 0 in the previous quarter. While we acknowledge the risk and potential of AMTM as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than AMTM but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.