Amentum's Q1 Earnings: A Hidden Gem in Defense and Aerospace Growth?

Amentum Holdings, Inc. (AMTM) delivered a robust Q1 2025 earnings report, showcasing its position as a key player in the defense and aerospace sector. While the stock has yet to capture widespread investor enthusiasm, a closer look at its financials and strategic positioning reveals compelling undervalued growth opportunities. Here's why investors should take note.

The Financial Foundation: Growth Amid Integration

Amentum's Q1 results reflect steady progress since its 2023 acquisition of Jacobs' Critical Mission Solutions (CMS) and Cyber & Intelligence businesses. Total revenue hit $3.4 billion, up 72% year-over-year (YoY) under GAAP, driven by the CMS integration. On a pro forma basis—adjusting for the merger—the growth was 2% organic, demonstrating underlying resilience.

Profitability improved, with Adjusted EBITDA rising 3% to $262 million, and a margin of 7.7% (up 10 basis points). The company also generated $102 million in free cash flow, a critical metric for sustaining growth and debt reduction.

Key segments performed as follows:
- Digital Solutions: Revenue grew 1% to $1.286 billion, fueled by new contracts in cybersecurity and 5G infrastructure.
- Global Engineering Solutions: Revenue rose 3% to $2.13 billion, driven by defense and energy projects like the $3 billion U.S. Department of Energy (DOE) West Valley Demonstration Project (WVDP).

Backlog: The Fuel for Future Growth

Amentum's $45.2 billion total backlog—a 65% increase from Q1 2024—represents a treasure trove of secured revenue. Funded backlog ($6.6 billion) ensures near-term visibility, while contracts like the $447 million Air Force Global Prepositioned Materiel Services (GPMS) and $248 million DOD Global Counter Threat Finance (GCTF) highlight its dominance in high-value, long-term programs.

The backlog's scale suggests Amentum is well-positioned to outperform even if near-term revenue growth remains modest. This stability could attract investors seeking steady, low-volatility growth in a sector often buffeted by geopolitical risks.

Why It's Undervalued: Missed by the Market?

Despite its strong fundamentals, Amentum's stock has underperformed peers like Boeing (BA) and Lockheed Martin (LMT) over the past year. Here's why it might be overlooked—and why that's a mistake:

1. Debt Overhang: Amentum carries $4.7 billion in debt, a legacy of its CMS acquisition. However, its net leverage improved to 4.0x, and free cash flow ($102 million in Q1) is steadily reducing this burden.
2. Sector Sentiment: Defense stocks have faced headwinds due to budget uncertainties and macroeconomic concerns. Investors may be overlooking Amentum's diversified client base (government and commercial sectors) and its high-margin cybersecurity and infrastructure contracts.
3. Valuation Metrics: At a trailing P/E of 12.5x (vs. Boeing's 25x and Lockheed's 18x), Amentum appears cheaper relative to its growth prospects. Its EV/EBITDA of 8.5x also lags peers, suggesting room for multiple expansion as integration synergies materialize.

Growth Catalysts to Watch

1. Government Contracts: U.S. defense spending is projected to rise 5% annually through 2027, and Amentum's backlog is 85% government-related. The WVDP and GPMS contracts alone represent over $3.5 billion in revenue.
2. Commercial Expansion: The $400 million+ in Q1 commercial wins for 5G and infrastructure projects signals untapped potential in private-sector engineering—a market growing at 6% annually.
3. Margin Improvements: The 10-basis-point EBITDA margin expansion hints at operational efficiency gains. If margins stabilize near 8%, earnings could accelerate beyond guidance.

Risks to Consider

• Dependence on U.S. Government: Federal budget cuts or delays could impact backlog execution.
• Debt Management: Interest costs remain a drag, though free cash flow is on track to reduce leverage further.
• Integration Risks: While the CMS merger appears successful, unforeseen synergies or operational hiccups could emerge.

Investment Thesis: A Buy at Current Levels?

Amentum's Q1 results underscore its transition from an acquisition-driven company to one with organic growth legs. Its backlog provides a multiyear revenue runway, and its valuation discounts appear excessive given its stability and diversification.

Recommendation:
- Buy: For investors seeking a lower-risk defense play with undervalued growth, Amentum offers strong fundamentals at a reasonable price.
- Hold: If the broader market remains wary of sector-specific risks or macroeconomic slowdowns.

Historically, when a buy signal was triggered on Amentum's quarterly earnings announcement dates and held for 60 trading days between 2020 and 2025, the strategy produced an average return of 1.47%, with a compound annual growth rate (CAGR) of 0.76%. While the stock reacted positively to earnings releases, the strategy underperformed the benchmark, which returned 108.50% over the same period. The maximum drawdown of -11.78% highlights the potential volatility investors might face. These results suggest that while the strategy offers modest gains, it carries risk and may not outperform broader market movements. The Sharpe ratio of 0.01 indicates that the strategy's returns are subject to significant volatility relative to its risk.

Backtest the performance of Amentum (AMTM) when 'buy condition' is triggered on quarterly earnings announcement dates, and hold for 60 trading days, from 2020 to 2025.

Final Thoughts

Amentum isn't a flashy name in the defense space, but its Q1 results reveal a company poised to deliver steady, underappreciated growth. With a backlog that rivals its peers and a valuation that leaves room for upside, this could be a stock primed to shine in 2025 and beyond.

Investors seeking a hidden gem in a sector primed for growth should add Amentum to their watchlist—and consider a position while it remains overlooked.