Truist Names Favorites in 'Gov't Services: Bus Trip Recap' Note

Truist analyst Tobey Sommer highlighted KBR, CACI, AMTM, PSN, LDOS, and VVX as Favorite names in its "Gov't Services: Bus Trip Recap" note.

The analyst said: "We visited AMTM, BAH, CACI, ICFI, LDOS, PSN, and VVX in the DC area yesterday. While companies in our coverage seemed optimistic on DOGE's initiatives, we remain cautious headline risk could continue to pressure multiples across the group. We see strong revenue momentum across the group continuing in the near-term, but an extended CR and budget uncertainty could lead to moderating book-to-bills by 2Q25. Our favorites are KBR, CACI, AMTM, PSN, LDOS, and VVX.

DOGE...don't know what you don't know. Companies expressed optimism that services could serve the Department of Government Efficiency (DOGE) in achieving stated priorities. Uncertainty and a range of outcomes remain, and risk will be difficult to size for any company until DOGE provides a concrete plan. Most see regulation overreach as "low hanging fruit" and think DOGE could show progress through utilizing the executive branch for deregulation. While FedCiv has been thought of as most exposed, cuts in defense will likely be needed to hit DOGE's goals. We understand arguments for relative fundamental outperformance, but recognize all stocks would likely struggle amid widespread budget cuts. We expect uncertainty/headline risk to continue to pressure multiples.

Industry view is continuing resolution (CR) unlikely to hit 2025 results. Overall, consensus view of the group expects a CR to extend through at least March with some seeing risk of it extending a full fiscal year. We see a CR extending through March to likely impact contract awards in 2Q and would expect to see moderating book-to-bills, but unlikely to drive a significant deceleration in revenue growth in ’25. Comments on customer behavior varied with some noting seeing customers being more hesitant to obligate dollars while others highlighting a sense of urgency. Negotiations to avert a government shutdown remained ongoing as of publish [AP], but we heard limited concern that lawmakers would not be able to reach a deal on a new CR.

KBR (KBR, Buy) remains a favorite name in the group, activist highlights SOTP opportunity. Yesterday, the WSJ reported activist Irenic Capital (Private) plans to push the company to sell or spin off Sustainable Solutions (STS), which represents ~40% of EBITDA. We have previously expressed our view that standalone STS could fetch a 16x-20x EV/EBITDA multiple. Assuming a 16x EV/EBITDA multiple for STS would imply KBR’s Government business trading at ~6x EV/EBITDA, or a 47% valuation discount to peers. In our view, the 2020 distressed sale of Lummus Technology (Private) at ~12x EV/EBITDA out of McDermott’s bankruptcy could set a valuation floor.

Parsons (PSN, Buy) sounded most bullish. CEO Carey Smith highlighted the company's business mix with 40% associated with Critical Infrastructure (CI). Management also noted the company's strong backlog of $8.8B with 66% funded and exclude $13B of awards that have not been booked. Management remains positive on growth with white space opportunities with DOGE, PFAS solutions, and Middle East CI priorities.

Skepticism appears highest on Amentum (AMTM, Buy). AMTM reported the company's first quarter as a public company earlier this week. AMTM beat on revenue/EBITDA, but slower bookings drove stock weakness. AMTM reported FY24 book-to-bill of 0.8x or 0.9x when included $2B of awards under protest. Higher net leverage (4.1x), PE concentration, and Jacobs' (J, Cook, Hold) eventual divestiture of ~8% ownership remain overhangs. Management noted the company's longer average contract duration of 7-8 years can drive volatility in B2B. AMTM also highlighted synergies to allow for higher volumes of bids and drive margin improvement over time. We continue to think there could be upside to management's synergy target of $50M-$70M."

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