On Friday, Truist shared insights from its recent "Gov't Services: Bus Trip Recap" note, revealing a cautious stance on the sector despite companies expressing optimism about their services catering to the Department of Government Efficiency (DOGE). The firm highlighted potential risks that could pressure stock multiples across the group, including headline risk and budget uncertainties.
Despite these concerns, Truist identified KBR (NYSE:KBR), CACI, Amentum (AMTM), Parsons (NYSE:PSN), Leidos (LDOS), and Vectrus (NYSE:VVX) as its favorite names within the sector. According to InvestingPro data, AMTM currently trades near its 52-week low, with its stock down nearly 36% year-to-date, potentially presenting an opportunity for value investors.
The analyst from Truist reported that companies visited in the DC area were optimistic about DOGE's initiatives but acknowledged the uncertainty surrounding DOGE's concrete plans and potential regulatory overreach. The industry consensus suggests that a continuing resolution (CR) is likely to extend through at least March 2025, which could affect contract awards in the second quarter but is not expected to significantly decelerate revenue growth within the year.
KBR (NYSE:KBR) was noted as a standout favorite, particularly in light of recent news from the Wall Street Journal about Irenic Capital's intentions to encourage KBR to sell or spin off its Sustainable Solutions division, which accounts for a significant portion of its EBITDA. Truist suggested that this segment alone could command a high multiple, potentially underscoring a valuation discount for KBR's Government business compared to its peers.
Parsons (NYSE:PSN) was mentioned as the most bullish among the companies, with CEO Carey Smith emphasizing the company's strong business mix and backlog. The company's focus on Critical Infrastructure, opportunities with DOGE, PFAS solutions, and Middle East priorities were highlighted as positive growth drivers.
Conversely, skepticism was highest concerning Amentum (NYSE:AMTM), which recently reported its first quarter as a public company. Although AMTM beat revenue and EBITDA expectations, concerns were raised due to slower bookings and stock weakness. The company's higher leverage and ownership dynamics, along with the potential for volatility in its book-to-bill ratio due to longer average contract durations, were cited as challenges. However, Truist acknowledged the possibility of upside to management's synergy targets.
In other recent news, Amentum, a global engineering and technology solutions provider, has secured several substantial contracts and made key changes in its leadership team. Amentum has been awarded contracts by the U.S. Air Force, U.S. Navy, and the Department of Energy, valued at $279 million, $105 million, and $3 billion respectively. These contracts task Amentum with providing aviation operations support, enhancing Airborne Electronic Attack Systems and Intelligence, Surveillance, and Reconnaissance capabilities, and leading the cleanup of the West Valley Demonstration Project in New York state.
Additionally, Amentum has made significant changes in its leadership team with the appointment of Darren Burton as its new Chief People Officer and Stephen A. Arnette as the new Chief Operating Officer. The company has also implemented a new Severance Plan for Key Employees and finalized employment contracts for top executives.
Truist Securities initiated coverage on Amentum's shares with a Buy rating, citing potential value creation following Amentum's merger with Jacobs CMS/C&I businesses.
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