Vectrus Inc: Ignored National Security Stock Has Potential to Double

VEC Stock an Ideal Play on Biden’s “America First” Policy

Over the last four years or so, the U.S. has turned its attention to what makes sense for the country. From former President Donald Trump’s “Make America Great Again” push to President Joe Biden’s “America First” initiative, it’s all about the U.S.

That means focusing on national security and long-term plans that benefit America.

A compelling small-cap play on the government services segment with strong risk/reward potential is Vectrus Inc (NYSE:VEC).

Vectrus is a company with billion-dollar-plus revenues and a market cap hovering at a major discount to revenues.

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The company provides a broad range of services—including supply chain, logistics, IT, engineering, and smart energy services—to U.S. government customers in 129 locations and 26 countries.

An intriguing fact is that more than 40% of Vectrus Inc’s over-7,000 employees have military backgrounds. (Source: “Vectrus Receives Inaugural VETS Indexes 3-Star Employer Award,” Cision PR Newswire, May 25, 2021.)

But despite strong growth and an attractive valuation, Vectrus stock has underperformed the S&P 500 and is 20% off its high.

Chart courtesy of StockCharts.com

Growth & Valuation Supports Bull Case for VEC Stock

Vectrus Inc has a market cap of only $569.0 million, but its revenues have easily been north of $1.0 billion over the last five years.

While the COVID-19 pandemic slowed things down a bit in 2020, the company still managed to achieve record revenues.

Fiscal YearRevenues (Billions)Growth
2016$1.2N/A
2017$1.1-6.4%
2018$1.314.8%
2019$1.48.1%
2020$1.40.9%

(Source: “Vectrus Inc.” MarketWatch, last accessed September 24, 2021.)

Vectrus’ revenue outlook is bullish, with estimates that have been rising. Analysts estimate that the company will report revenue growth of 28.5% to $1.8 billion in 2021 and 10.4% to nearly $2.0 billion in 2022. (Source: “Vectrus, Inc. (VEC),” Yahoo! Finance, last accessed September 24, 2021.)

Given the company’s current market cap, Vectrus trades at just 0.29 times its consensus 2022 revenue estimate.

Not only has Vectrus Inc been ramping up its revenues, but the company has consistently delivered earnings before interest, taxes, depreciation, and amortization (EBITDA) income.

 Fiscal YearEBITDA (Millions)Growth
2016$47.7N/A
2017$43.3-9.2%
2018$52.922.2%
2019$57.79.1%
2020$55.9-3.2%

(Source: MarketWatch, op. cit.)

Vectrus Inc has also been consistently churning out earnings-per-share (EPS) profits based on generally accepted accounting principles (GAAP).

 Fiscal YearGAAP Diluted EPSGrowth
2016$2.16N/A
2017$5.31145.8%
2018$3.10-41.6%
2019$2.86-7.9%
2020$3.1410.1%

(Source: MarketWatch, op. cit.)

For this highly profitable company, we’re also seeing rising EPS estimates.

Analysts estimate that Vectrus Inc’s GAAP earnings will rise to $4.28 per diluted share this year and to $4.94 in 2022. (Source: Yahoo! Finance, op. cit.)

If that’s not enough, Vectrus is a free cash flow machine, reporting a five-year best of $59.6 million in 2020. That’s year-over-year growth of 422.4%, and it was during a pandemic.

Fiscal YearFree Cash Flow (Millions)Growth
2016$35.9N/A
2017$33.1-7.8%
2018$30.0-9.2%
2019$11.4-62.0%
2020$59.6422.4%

(Source: MarketWatch, op. cit.)

Analyst Take

Institutions and insiders have been jumping on Vectrus stock. At present, 213 institutions hold a 91.6% stake in the outstanding shares. Moreover, insiders added 22,907 shares of VEC stock to their portfolions over the last six months. (Source: Yahoo! Finance, op. cit.)

My bull case for Vectrus Inc lies with the strong tailwinds in the government services segment during these tension-filled times, as well as with the company’s attractive valuation.

Vectrus stock looks extremely cheap versus its revenue estimates. Furthermore, VEC stock trades at only 11.3 and 9.8 times the company’s consensus 2021 and 2022 EPS estimates, respectively.