Amentum (AMTM): Deleveraging for Long-Term Growth
Unlocking shareholder value through a disciplined debt reduction strategy and robust free cash flow generation.
In our previous article, we discussed why Amentum (AMTM) represents a compelling post-spin opportunity for investors.
Trading at just 10x NTM P/E and offering a 10% free cash flow (FCF) yield, the company’s misunderstood potential lies in its $45 billion backlog, mission-critical contracts, and strategic alignment with long-term government priorities. However, one of the most important aspects of Amentum’s investment case is its plan to de-leverage its balance sheet, which will not only enhance financial flexibility but also directly impact shareholder returns. In this follow-up, we’ll take a closer look at the numbers behind Amentum’s deleveraging strategy and its implications for future earnings per share (EPS).
Deleveraging Goals: From 4x to 3x Net Debt to EBITDA
Amentum’s leadership has made it clear: reducing leverage is a top priority. As of FY2024, Amentum’s net debt to EBITDA stands at approximately 4.1x. Management aims to bring this down to 3.0x by the end of FY2026, a significant step toward improving the company’s financial stability and attractiveness to investors.
Here’s a breakdown of the key metrics:
Net Debt (FY2024): $4.32 billion (gross debt of $4.77 billion, offset by $452 million in cash).
Target Net Debt (FY2026): $3.3 billion to $3.45 billion.
Projected EBITDA (FY2026): $1.1 billion to $1.15 billion (including $60 million in planned synergies).
Achieving this target will require approximately $1.02 billion in net debt reduction, which the company plans to fund primarily through its robust free cash flow generation. With guidance for $475M-$525M in FCF annually starting in FY2025, Amentum has the cash flow muscle to meet its goals without compromising growth investments.
Why Deleveraging Matters
Interest Expense Savings: Reducing debt directly lowers Amentum’s annual interest expense, which is currently estimated at $334 million based on its weighted average cost of debt (~7%). By reducing gross debt by $1.02 billion, Amentum could save approximately $72 million annually in interest payments. This cost reduction improves profitability and frees up cash flow for other uses.
EPS Accretion: Interest savings flow directly to the bottom line, creating immediate value for shareholders. With 243 million fully diluted shares outstanding (FDSO), the $72 million in annual interest savings translates to approximately $0.30 in incremental EPS accretion by FY2026 - or a 7% CAGR assuming NO growth. For context, this is a meaningful contribution to earnings and underscores how deleveraging can enhance shareholder returns. (Excel image at the bottom)
Balance Sheet Strength: Amentum’s deleveraging not only reduces financial risk but also positions the company to pursue growth opportunities more aggressively. A stronger balance sheet increases the company’s flexibility for acquisitions, reinvestment in high-growth segments, and potential shareholder returns through dividends or buybacks.
This company ticks a lot of the boxes I look for in a portfolio. You can learn more about the portfolio metrics on which I focus in the article below:
Free Cash Flow Fuels the Plan
Amentum’s ability to generate significant free cash flow is the cornerstone of its deleveraging strategy. Here’s what we know:
FY2025 guidance projects $475M-$525M in FCF, driven by stable operating margins and a robust backlog execution.
Over the next three years, this cash flow provides ample capacity to both reduce debt and fund strategic initiatives.
Importantly, Amentum’s backlog of $45 billion (3.2x revenue coverage) ensures long-term visibility and stability in cash flow generation, mitigating risks from macroeconomic uncertainty or temporary delays in new contract awards.
Amentum’s Debt Profile
Amentum’s current debt structure includes:
$3.75 billion in senior secured Term Loan B debt, with an interest rate of SOFR + 2.25%.
$1.0 billion in senior unsecured notes at a fixed rate of 7.25%.
Approximately 40% of debt is floating-rate, though $1.9 billion is hedged via interest rate swaps.
Given this structure, deleveraging will disproportionately benefit floating-rate debt, which has higher sensitivity to rising interest rates. This further underscores the value of debt reduction in a high-interest rate environment.
Valuation Implications
Deleveraging is one of several catalysts that could unlock value for Amentum shareholders. Here’s how:
Improved Multiples: As Amentum reduces leverage, it could be rerated closer to peers trading at 14x-18x P/E. This revaluation alone presents significant upside from the current 10x P/E even before considering the EPS accretion from the deleveraging.
Enhanced Margins: Lower interest expense improves net margins, bolstering overall profitability metrics. (They are also expanding EBITDA margins).
Cash Flow Deployment: Reduced debt obligations free up cash for reinvestment, dividends, or share buybacks, further enhancing shareholder value.
Risks to Monitor
While Amentum’s deleveraging strategy is compelling, investors should remain aware of potential risks:
Execution Risk: Achieving $1.02 billion in debt reduction requires consistent free cash flow generation and disciplined capital allocation.
Interest Rate Volatility: Rising interest rates could increase debt service costs, though Amentum’s hedging strategy mitigates this risk to some extent.
Macroeconomic Uncertainty: Delays in federal budget approvals or shifts in spending priorities could temporarily impact backlog execution.
Conclusion: Deleveraging Unlocks Value
Amentum’s commitment to reducing net debt to EBITDA from 4x to 3x by FY2026 underscores its focus on financial discipline and shareholder value creation. By saving $72 million annually in interest expense and delivering $0.30 in incremental EPS, the deleveraging plan directly enhances earnings and positions Amentum as a stronger, more competitive player in its industry.
For investors, Amentum represents a unique opportunity to benefit from a misunderstood spin-off that combines near-term catalysts, like deleveraging, with long-term growth potential fueled by its $45 billion backlog. As Amentum continues to execute on its strategy, the company’s true value should become increasingly apparent to the market.
Do you agree that Amentum’s deleveraging plan strengthens the investment case? Let us know your thoughts, and subscribe to Safe Harbor Stocks for more in-depth analyses and actionable investment ideas.
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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.