Nuclear And Space Contract Backlog Will Drive Long-Term Earnings Power

Catalysts

About Amentum Holdings

Amentum Holdings delivers advanced engineering, digital and nuclear solutions for government, commercial and international customers across defense, energy, intelligence and space end markets.

What are the underlying business or industry changes driving this perspective?

• Ramp up of large, long duration awards such as the U.S. Space Force Range contract, Sellafield remediation and NASA Cosmos is set to convert the current $47 billion backlog and $20 billion of pending bids into higher run rate revenues and improved operating leverage, supporting sustained earnings growth.
• Expanding demand for resilient space and missile defense architectures, including Shield and other space domain awareness programs, is increasing the mix of higher value engineering and integration work, which should lift segment margins and consolidated EBITDA over time.
• Global investment in nuclear power for energy security and AI driven electricity needs is driving multi decade opportunities across design, plant life extension and decommissioning, positioning Amentum’s roughly 17% nuclear portfolio for double digit growth and margin accretive contribution to earnings.
• Rapid build out of critical digital infrastructure, including 5G networks, hyperscaler data centers and secure cloud ready networks, is expected to sustain above company average growth in Digital Solutions and improve net margins as higher margin commercial and international work scales.
• Completion of major integration milestones and delivery of at least $60 million in net run rate cost synergies by fiscal 2026, combined with disciplined deleveraging toward less than 3 times net leverage, should expand EBITDA margins toward the 8.5% to 9% target and support faster growth in earnings per share and free cash flow.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Amentum Holdings's revenue will grow by 2.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.5% today to 3.2% in 3 years time.
• Analysts expect earnings to reach $501.1 million (and earnings per share of $2.14) by about December 2028, up from $66.0 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $607.7 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 20.7x on those 2028 earnings, down from 108.0x today. This future PE is lower than the current PE for the US Professional Services industry at 24.9x.
• Analysts expect the number of shares outstanding to grow by 0.12% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.28%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Sustained or repeated U.S. government funding disruptions and shifting administration priorities could delay contract awards such as the $20 billion of proposals awaiting decision, reduce spending on certain programs and introduce lumpiness into Amentum’s otherwise long cycle portfolio. This would pressure revenue visibility and slow earnings growth.
• Execution risk on large, complex awards like the U.S. Space Force Range contract, Sellafield remediation and the protested NASA Cosmos program could lead to schedule slips, cost overruns or adverse contract repricing in markets that are otherwise enjoying secular growth. This would cap margin expansion and constrain EBITDA improvement.
• The nuclear energy renaissance and SMR deployment, while a long term tailwind, may materialize more slowly than anticipated due to regulatory hurdles, permitting delays and project financing challenges around gigawatt scale plants and new reactor designs. This would postpone the expected double digit growth contribution and delay margin accretive earnings from the roughly 17 percent nuclear portfolio.
• Intensifying competition and pricing pressure in digital infrastructure, AI enabled defense and space systems, including from both established primes and well funded new entrants, could force Amentum to accept lower fee structures on bids in its accelerating growth markets. This would dampen net margin expansion even if top line continues to grow.
• Failure to fully realize or sustain the targeted at least 60 million dollars in net run rate cost synergies and to manage integration complexities from one of the largest mergers in the industry could leave structural overhead higher than planned. This would limit EBITDA margin progress toward the 8.5 percent to 9 percent goal and mute earnings and free cash flow growth.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $33.45 for Amentum Holdings based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $40.0, and the most bearish reporting a price target of just $27.0.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $15.4 billion, earnings will come to $501.1 million, and it would be trading on a PE ratio of 20.7x, assuming you use a discount rate of 8.3%.
  
• Given the current share price of $29.25, the analyst price target of $33.45 is 12.6% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.