We came across a bullish thesis on Amentum Holdings, Inc. (NYSE:AMTM) on Safe Harbor Stocks’ Substack by Kristopher Rymer. In this article, we will summarize the bulls’ thesis on AMTM. Amentum Holdings, Inc. (NYSE:AMTM)’s share was trading at $22.48 as of Jan 6th.
An employee of the company using the latest technology solutions on their laptop.
Amentum, trading at just 10x NTM P/E with a 10% free cash flow (FCF) yield, presents a compelling investment case driven by its $45 billion backlog and alignment with long-term government priorities. Despite its current undervaluation, the company’s most significant opportunity lies in its focus on deleveraging, which is expected to enhance financial flexibility and directly impact shareholder returns. Amentum aims to reduce its net debt to EBITDA ratio from 4.1x in FY2024 to 3.0x by FY2026, requiring a $1.02 billion reduction in net debt. This goal will be supported by the company’s strong FCF generation, projected at $475M-$525M annually starting in FY2025, which is sufficient to fund debt reduction and strategic investments.
Deleveraging offers several advantages, most notably the reduction in interest expense. Amentum’s current interest expense of $334 million, based on its 7% average cost of debt, would decrease by approximately $72 million annually if it reduces debt by $1.02 billion. This would result in an estimated $0.30 increase in earnings per share (EPS) by FY2026, translating to a 7% annual growth in EPS, assuming no business growth. Additionally, deleveraging will improve Amentum’s balance sheet, increasing its flexibility for acquisitions, reinvestment, and potential shareholder returns through dividends or buybacks.
The company’s ability to generate robust FCF is key to its deleveraging strategy, with a stable backlog ensuring long-term cash flow visibility. This $45 billion backlog, covering 3.2 times revenue, mitigates risks from macroeconomic fluctuations and delays in new contracts. Moreover, Amentum’s debt structure, including floating-rate and fixed-rate debt, benefits from reduced gross debt, especially in a rising interest rate environment, where its floating-rate debt is more sensitive.
The combination of deleveraging, improved cash flow, and a potential revaluation of the company’s P/E multiple could unlock significant value for shareholders. As Amentum reduces its leverage, it is expected to be rerated closer to its peers, which trade at higher multiples, potentially leading to substantial upside. With improved margins, lower interest expenses, and increased cash flow, Amentum’s deleveraging strategy is poised to enhance shareholder value and position the company for sustained growth.
However, risks remain, including the execution of its debt reduction plan, interest rate volatility, and potential delays in federal budget approvals. Nonetheless, Amentum’s strategic focus on deleveraging, coupled with its strong backlog, presents an attractive opportunity for investors seeking both near-term catalysts and long-term growth potential.
Amentum Holdings, Inc. (NYSE: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.