April 11, 2017 | 9:12 AM by Jaguar | avo@jaguaranalytics.com

Vectrus (VEC) – Military Logistics Provider Under New CEO

Colorado Springs-based Vectrus (VEC) is a US Government services contractor providing facility and logistics services worldwide. They manage infrastructure assets and supply chains as well as information technology and network communications across all branches of the military. In more detail, they perform a multitude of services which vary by location that can include mail delivery, food preparation, emergency services, life support, civil engineering, warehouse and ammunition management and distribution, maintenance of vehicle and equipment stocks and air traffic control.

Vectrus was spun-off from Exelis in September 2014 whose roots go all the way back to the 1920s.

Operations Map

Aside from locations in the Continental US, Hawaii and Alaska, Vectrus has a presence in Thule Greenland, UK, Germany, Italy, Spain, Romania and Turkey in Europe, Afghanistan, Japan and South Korea in Asia, and Qatar, Kuwait and Bahrain in the Middle East. Within these countries, there are single and multiple locations, for example in Afghanistan, Vectrus supports 10 military bases and in Germany they have contracts at five sites.

No matter where the actual operations are, Vectrus is paid in US Currency as they are contractors for the US Federal government. Aside from local transaction costs in various countries, the company is mostly unaffected by foreign exchange headwinds.

vec oprerations

Ongoing contracts

In March of this year, Vectrus was awarded $37 million base operations support contract at Maxwell-Gunter Air Force Base, Alabama, for work to be completed by March 2018.

Also in March, their existing Kuwait Base Operation and Security Support Services contract, known as K-BOSSS, was extended to for another year, with an option to extend to December 2018. This program contributed around $438 million in 2016, 37% of revenues, and is expected to bring in $110 million per quarter for FY2017. This is the same contract that, back on September 30th, the US government had announced it would not renew, causing a selloff and a 45% drop in share value.

These are in addition to many ongoing contracts in their global operational reach.

New CEO

In December 2016, Charles Prow was hired on as the new CEO for Vectrus, as well as being appointed to the board of directors. Mr. Prow is formerly of notable companies such as PricewaterhouseCoopers and IBM where he held the position of General Manager, Global Government Industry, working in a division that had global revenues in excess of 9 billion.

Vectrus does not have much coverage, Drexel Hamilton has a Hold rating as does Stifel, with a price target of $22 although it should be noted that they dropped their coverage recently. It is a low-margin business, typically around 4%, with annual revenues of $1.2 billion. Daily average share volume is around 75,000 and options are rarely traded.

Investor Presentation

During their 4Q earnings call on March 1st, management noted that they had continued to pay down debt, ending 2016 with total debt of $85 million, nearly 40% lower than in 2014. At 1.63x leverage, it puts them well below their 3.25x covenant level.

Aside from their existing contracts, CEO Prow updated their status regarding new business, which he said would be his “primary focus”. Vectrus has submitted approximately $1.5 billion in bids pending awards. In addition, they plan to submit nearly $6 billion more towards opportunities during the course of 2017 and into early 2018, all of which would be new business for the company. Management believes that there are several possibilities to build their pipeline and improve their overall probabilities of contract wins.

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DOD Budget

President Trump released his Budget Plan in mid-March in which he requested an increase of $54 billion for national defense spending, raising it up to $639 billion. While the plan is merely an outline, it emphasizes his viewpoint that the preceding administration showed “indiscriminate neglect” with massive budget cuts to the military. In part, his plan is to rebuild the US Armed Forces, address maintenance requirements and ensure the provision of training, equipment and needed infrastructure. As well, there is a call to improve tactical air fleet readiness, provide for urgent warfighting needs, and contribute resources to accelerate the defeat of ISIS. The President notes that the military has gotten smaller and has seen its technological edge erode, in spite of a more dangerous world.

If there was any doubt that Trump would be holding back in his campaign against ISIS, his actions in launching an air strike on a Syrian airfield installation in retaliation to chemical weapons attack on civilians may have helped dispel those thoughts. In short, increased military presence in Middle Eastern and European bases would necessitate larger operations and most likely more opportunities for Vectrus to add to their revenue base.

Final Observations

This is a low volume stock that despite the opportunities It presents, is not very well known or covered. With a new CEO and a new US administration’s outlook on the military, the company’s stock may be sitting at an interesting juncture. This could be a slow and steady business that may gain incremental new contract wins during the course of 2017.

VEC Chart

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