Amentum (AMTM): A Post-Spin Opportunity with Growth Potential

A resilient, undervalued business with critical government contracts and a $45B backlog poised for growth.

Introduction

Amentum (AMTM), a recent spin-off from Jacobs (J), offers investors a unique post-spin opportunity at an attractive valuation. Trading at 10x NTM P/E and delivering about a 10% free cash flow (FCF) yield based on company guidance, Amentum appears undervalued relative to its intrinsic strengths and competitive positioning. Despite its first earnings report as an independent public company showing no novel negative news, the stock sold off up to 12% today.

I believe this selloff reflects two primary factors:

1. Structural imbalances and mispricing often seen after spin-offs.

2. Concerns about potential spending constraints and efficiency initiatives under the new administration, primarily related to Department of Defense (DoD) budgets, which account for a significant portion of Amentum's revenue.

However, Amentum's record backlog and existing revenue composition offer resilience that investors may be underestimating. This resilience stems from the nature of Amentum's business:

• Light on civilian-related workforce budgets

• Involves critical missions such as environmental remediation

• Important to national security

Furthermore, Amentum's multi-decade footprint working with major U.S. government agencies, spanning up to 70 years, reinforces its reputation and stability in executing critical government contracts.

Source: AMTM Analyst Day

1. Amentum: A Newly Independent Entity

Background of the Spin-Off

Amentum's spin-off from Jacobs earlier this year marked the creation of a leading advanced engineering and technology solutions provider with a $320 billion per year TAM. The rationale for the spin-off centered on unlocking value in Jacobs' Critical Mission Solutions (CMS) and Cyber & Intelligence businesses, enabling Amentum to focus on high-growth end markets in defense, technology, and sustainability.

Source: AMTM Analyst Day, August 2024

As with many spin-offs, Amentum has faced:

• Limited analyst coverage and investor visibility, leading to temporary mispricing.

• Initial uncertainty around its financial and strategic guidance, further fueling investor hesitancy.

However, the company has now provided its first earnings report and guidance, delivering much-needed clarity for investors.

Market Reaction to the First Earnings Report

Key highlights from Amentum's inaugural earnings report include:

• FY 2025 Revenue Guidance: $13.8B - $14.2B.

• Adjusted EBITDA: $1.06B - $1.1B, signaling margin improvements.

• Free Cash Flow: $475M - $525M, underlining robust cash generation potential.

• Record Backlog: $45B, representing 3.2x revenue coverage and strong visibility into future revenue streams.

Despite these positive signals, the market reaction was severely negative after the conference call, with the stock declining up to 12%. This reaction likely reflects investor skittishness around broader industry concerns with upcoming initiatives from the new administration. However, no novel remarkable negative news was reported today, suggesting the selloff may be overdone.

Interestingly too, as I have posted on X recently, analyst estimates are far lower than I expect, or the company has guided the last several months at $1.41 per share for FY 2025. Granted, only two analyst provided estimates, and this bolsters the case for why spin-offs can provide attractive opportunities.

Source: Koyfin, S&P Capital IS

I had expected about $1.80 of EPS for 2025 and management came out with a $2.10 median guide yesterday evening. This guidance assumes no material impact on its operations due to changes from the new administration.

2. Valuation: A Deep Discount Opportunity?

Current and Comparable Metrics

At 10x NTM P/E and approximately a 10% FCF yield, Amentum trades at a discount to peers in government contracting, environmental remediation, and engineering solutions. Comparable businesses in defense and government services trade closer to 14x - 18x P/E with lower FCF yields.

Note the P/E below for Amentum is based on deeply depressed 2025 EPS about 33% lower than the company’s guide.

Source: Koyfin, S&P Capital IQ

• Pro Forma FY 2024: Revenue of $13.9B (+4% organic growth), Adjusted EBITDA of $1.05B (+7% growth).

• Backlog Strength: $45B backlog offers 3.2x annual revenue coverage, with 80%+ of pending awards tied to new business opportunities.

• Segment Margins: Continued EBITDA margin expansion (7.6%-7.8%) indicates improving operational leverage.

Cash Flow and Margin Prospects

Amentum's capital-light business model supports strong FCF generation. Management's guidance of $475M-$525M in FY 2025 FCF underscores its ability to de-leverage and allocate capital prudently.

• Debt Reduction: Net leverage expected to decline to ~3x by FY 2026 from 4x today, driven by operational cash flow.

• Synergy Realization: $60M in cost synergies are targeted by FY 2026, enhancing margins further.

3. Government Spending and New Administration Risks

Investor Concerns Around DoD and Efficiency Goals

A key driver of Amentum's business lies in its contracts with the Department of Defense (DoD) and other federal agencies such as DoE and DHS. The new administration's scrutiny on government efficiency and fiscal discipline has raised concerns about potential reductions in DoD spending, which accounts for a significant portion of Amentum's revenue.

However, these concerns may be overstated:

• Defense Spending Resilience: Historically, defense budgets have proven resilient under both major political parties due to geopolitical tensions and the U.S.'s global strategic commitments. For AMTM, this portion also includes more mission critical projects such as space and cybersecurity.

• Contractual Visibility: Amentum's backlog of $45B, with significant contributions from multi-year contracts, provides revenue stability even in uncertain political environments.

• Diversified Revenue Base: While 46% of revenue stems from defense, the remainder is tied to civilian, intelligence, environmental, and international markets, mitigating single-source risk. 20% of revenue also comes from international governments in places like the UK and Australia.

Why Amentum is Well-Positioned

Amentum's focus on next-generation technologies and modernization aligns with government priorities across administrations, including:

• Cybersecurity and IT modernization.

• Environmental remediation and clean energy solutions.

• Intelligence and space-based capabilities.

Additionally, global demand for Amentum's services, as reflected in its growing international contracts (e.g., U.K. hypersonic development, Australia defense infrastructure), offers insulation from domestic budgetary constraints.

Amentum's multi-decade experience, spanning up to 70 years of collaboration with major U.S. government agencies, further reinforces its credibility and ability to execute critical contracts in defense, environmental remediation, and national security.

Source: AMTM Analyst Day

4. Long-Term Investment Thesis

Key Catalysts for Growth

Amentum's upside potential stems from several clear catalysts:

• Post-Spin Rerating: As investor coverage grows and execution stabilizes, the valuation discount is likely to narrow back to those of its peers. If AMTM trades at the average P/E of its peers, its stock price would increase by approximately 50%.

• Strong Backlog Execution: With $45B backlog and significant contract wins (e.g., DOE Hanford Tank Cleanup, NASA COMET Contract), Amentum is well-positioned for consistent revenue growth.

• Cost Synergies: Management's $60M synergy target by FY 2026 offers margin expansion opportunities.

• Global Expansion: Increasing contributions from international markets and technology solutions provide new avenues for growth.

Risks to Monitor

• Continued scrutiny of government budgets and efficiency goals, particularly DoD spending.

• Execution risks in achieving cost synergies and EBITDA margin targets.

• Macroeconomic factors impacting government infrastructure and environmental spending.

• Possibility that backlog can be reduced. Backlog is not a guarantee of future revenue.

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Conclusion: A Misunderstood Opportunity

Amentum presents a compelling opportunity for investors seeking undervalued, cash-generative businesses with resilient end markets. Despite recent selloffs driven by post-spin dynamics and macro concerns, Amentum's record backlog, existing revenue composition, and alignment with long-term growth trends position it for success.

At 10x NTM P/E and a 10% FCF yield, Amentum trades at a discount that belies its strengths. With strong cash flow visibility, growing analyst coverage, and operational improvements underway, the selloff appears overdone. For patient investors, Amentum represents a rare opportunity to invest in a high-quality, defensive business at an attractive valuation.

Be sure to read our follow-up analysis on Amentum just below, after you complete this article:

Amentum (AMTM): Deleveraging for Long-Term Growth

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Disclosure: This information is provided for informational purposes only and should not be considered a solicitation or recommendation to buy or sell any securities. The author or entity providing this information may hold positions in the securities discussed. This is not investment advice.