Shareholders of Amentum would probably like to forget the past six months even happened. The stock dropped 40.9% and now trades at $21.00. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.
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Why Is Amentum Not Exciting?
Even though the stock has become cheaper, we’re cautious about Amentum. Here are three reasons we avoid AMTM, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Regrettably, Amentum’s sales grew at a sluggish 1.1% compounded annual growth rate over the last four years. This fell short of our benchmarks.
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Amentum’s revenue to rise by 1.5%, close to its 1.1% annualized growth for the past four years. This projection doesn’t excite us and implies its newer products and services will not lead to better top-line performance yet.
3. Mediocre Free Cash Flow Margin Limits Reinvestment Potential
Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Amentum has shown poor cash profitability relative to peers over the last five years, giving the company fewer opportunities to return capital to shareholders. Its free cash flow margin averaged 2.1%, below what we’d expect for a business services business.
Final Judgment
Amentum isn’t a terrible business, but it doesn’t pass our quality test. Following the recent decline, the stock trades at 8.4× forward P/E (or $21.00 per share). While this valuation is optically cheap, the potential downside is big given its shaky fundamentals. We’re fairly confident there are better investments elsewhere. We’d suggest looking at one of Charlie Munger’s all-time favorite businesses.
Stocks We Would Buy Instead of Amentum
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