Vectrus ($VEC)- Quick Look
Vectrus came to our attention this week as the price dropped 50%+ following the loss of a key contract. These price reactions are always interesting as it could lead to great opportunities. However, this contract loss may be a sign of great issues.
Here is our quick look:
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Vectrus is $170 million market cap company that provides infrastructure asset management, logistics and supply chain management and IT and network communications to the U.S. government.
They recently suffered a 50% drop in their stock price as they announced the loss of a key (K-BOSSS) contract. The contract represented roughly 30% of $1.2 billion in revenue per year.
Interestingly, just a few weeks before this announcement, the company also announced the loss of their APS-5 contracts in Kuwait and Qatar. Based on the $93 million contribution through June, the contracts mayt contribute $186 million (15%) to 2016 revenues.
Following the APS-5 contract announcement, the company maintained their full year guidance of $1.2 billion and $30 million in cash flow. I imagine both of the losses will have a dramatic impact on the 2017 though, but no word on any adjustments to 2016 guidance followign K-BOSSS.
For valuation, a back of the envelope calculation shows the prior $33 price stock was at 11x P/E, assuming $3 EPS. Holding all steady, minus the revenues for 2017, you are still at 11x P/E for a $16 stock price, assuming a $1.50 EPS. This gets a little more nuanced when you consider stock continues to grow 300k/year for founder’s grants (minimal) and may be margin compression.
Backlog over year have continued to decline, stepping down from $2.8 billion in 4Q 2014 to $2.3 billion in 2Q 2016.
Cash flow is decent, yielding 8% before the move down. Without more in depth work, it’s difficult to accurately predict cash flows, but we can estimate it will suffer.
Up to now, the company has been paying down their debt ahead of schedule. But they have roughly $100 million remaining, or closer to 2 x Debt/EBITDA. If we look ahead, they will likely be north of 3x, potentially 4x with these losses.
The company appears to have maintained investor sentiment though as they have announced their $1 billion of proposals in a market with $8 billion of opportunity. Sounds exciting.
What is concerning though is not just the losses of the contracts, but the way they lost. If we look at K-BOSSS, the awarded contract was over $100 million less than Vectrus’ contract. Granted, the scope of work may have changed, but a quick discussion leads me to believe that this was quite surprising to them. More so when you consider it moved from cost plus to fixed, as fixed should bring higher margins.
Inability to adapt to a changing environment is a big red flag, and it could be detrimental to company that does not have the scale to compete with bigger competitors.
There could be more pain ahead.
- Mike Zapata
Sententia Capital Management
Here is our quick look:
----
Vectrus is $170 million market cap company that provides infrastructure asset management, logistics and supply chain management and IT and network communications to the U.S. government.
They recently suffered a 50% drop in their stock price as they announced the loss of a key (K-BOSSS) contract. The contract represented roughly 30% of $1.2 billion in revenue per year.
Interestingly, just a few weeks before this announcement, the company also announced the loss of their APS-5 contracts in Kuwait and Qatar. Based on the $93 million contribution through June, the contracts mayt contribute $186 million (15%) to 2016 revenues.
Following the APS-5 contract announcement, the company maintained their full year guidance of $1.2 billion and $30 million in cash flow. I imagine both of the losses will have a dramatic impact on the 2017 though, but no word on any adjustments to 2016 guidance followign K-BOSSS.
For valuation, a back of the envelope calculation shows the prior $33 price stock was at 11x P/E, assuming $3 EPS. Holding all steady, minus the revenues for 2017, you are still at 11x P/E for a $16 stock price, assuming a $1.50 EPS. This gets a little more nuanced when you consider stock continues to grow 300k/year for founder’s grants (minimal) and may be margin compression.
Backlog over year have continued to decline, stepping down from $2.8 billion in 4Q 2014 to $2.3 billion in 2Q 2016.
Cash flow is decent, yielding 8% before the move down. Without more in depth work, it’s difficult to accurately predict cash flows, but we can estimate it will suffer.
Up to now, the company has been paying down their debt ahead of schedule. But they have roughly $100 million remaining, or closer to 2 x Debt/EBITDA. If we look ahead, they will likely be north of 3x, potentially 4x with these losses.
The company appears to have maintained investor sentiment though as they have announced their $1 billion of proposals in a market with $8 billion of opportunity. Sounds exciting.
What is concerning though is not just the losses of the contracts, but the way they lost. If we look at K-BOSSS, the awarded contract was over $100 million less than Vectrus’ contract. Granted, the scope of work may have changed, but a quick discussion leads me to believe that this was quite surprising to them. More so when you consider it moved from cost plus to fixed, as fixed should bring higher margins.
Inability to adapt to a changing environment is a big red flag, and it could be detrimental to company that does not have the scale to compete with bigger competitors.
There could be more pain ahead.
- Mike Zapata
Sententia Capital Management
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