We came across a bullish thesis on Amentum Holdings, Inc. (AMTM) on Substack by Acid Investments. In this article, we will summarize the bulls’ thesis on AMTM. Amentum Holdings, Inc. (AMTM)’s share was trading at $18.67 as of March 24th. AMTM’s forward P/E was 8.73 according to Yahoo Finance.
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Jacobs executed a reverse Morris trust transaction last year, merging its Critical Missions Solutions and Cyber & Intelligence government services business with Amentum to form a new publicly traded government services company. Following the spin-off, Jacobs retained an ~8% stake but had previously disclosed plans to divest it. Since the spin, Amentum’s stock has struggled, dropping from ~$30 to ~$17, largely in line with broader sector weakness driven by concerns over Department of Defense spending cuts. Despite this, Amentum’s portfolio remains diversified, with strong exposure to defense and space sectors, which are relatively insulated from budget reductions. The company’s revenue streams are well spread out, with its largest contract accounting for just 4% of total revenue.
Jacobs recently announced a full exit from Amentum through a secondary offering, structured as a debt-for-equity swap with BofA to maintain tax efficiency. This move eliminates overhang uncertainty, though the offering’s $16.50 pricing represented a significant discount. The market reacted positively to the removal of uncertainty, with pre-market trading turning green. The indiscriminate selling by BofA’s lending arm contributed to high trading volume, with Amentum shares swinging between $18.77 and $16.95 in a single day, ultimately closing down 8%. Despite the March 10 announcement of the sale, the sharp drop came only after pricing was finalized, highlighting potential market inefficiencies.
Currently, Amentum trades at a deep discount compared to peers, ranking among the lowest on an FY25 EV/EBITDA basis alongside V2X and the absolute cheapest on an FY25 P/FCF basis, trading below 10x free cash flow. Some of this discount may be justified, as Amentum’s forecasted FY25 EBITDA margins of 7.8% are the weakest in the sector aside from V2X’s 7%. Peers boast 10-12% margins, indicating Amentum’s contracts may be of lower quality. Additionally, the company carries the highest leverage in its peer group, with a 4x debt-to-EBITDA ratio compared to competitors’ 2-3x. However, management has committed to reducing leverage over the next two years, a move that could drive significant shareholder returns if executed properly. A firm with $500M in EBITDA valued at $5B but burdened with $3B in debt would see its equity value increase by 50% if it reduces debt by $1B while maintaining enterprise value.
Despite margin concerns, Amentum has strong backlog coverage, ensuring revenue stability. With two-thirds of contracts structured as cost-plus, inflationary pressures should have a limited impact on margins. Management aims to push EBITDA margins into the high-8% to 9% range, which, coupled with deleveraging, could drive a meaningful stock rerating.
CEO Steven Demetriou recently demonstrated confidence in Amentum’s future by purchasing approximately $2 million worth of shares, followed by another director’s ~$100K buy. Demetriou, who successfully led Jacobs for nearly a decade and delivered substantial shareholder value, now holds around 800,000 shares, valued at approximately $13.6 million at current prices. His open-market purchase reinforces his belief in Amentum’s long-term potential. This insider buying highlights management’s conviction in the company’s ability to execute its margin expansion and deleveraging strategy, further strengthening the investment case at current levels.
Amentum Holdings, Inc. (AMTM) is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 29 hedge fund portfolios held AMTM at the end of the fourth quarter which was 28 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.