VSE Corp. (VSEC) – Fleet & Federal Focus
VSE Corp. is an aftermarket company providing repair services, distribution, logistics, supply chain management support and consulting services for land, sea and air transportation assets in the public and private sectors.
Several weeks ago, the company reported its Q1 results in which:
-Total Revenue increased 4.4%
-Aviation Revenue increased 18%
-Fleet Revenue increased 3%
-Federal & Defense Revenue decreased 4%
-Federal & Defense Bookings increased 31%
Management said that although their Aviation segment achieved significant market share gains in the first quarter, they anticipate the performance of this segment to be adversely impacted for the balance of the year.
However, it’s a different story for their Fleet and Federal & Defense segment, which represent approximately 70% of trailing 12-month revenue. These segments are expected to provide a stable base of business that should offset near-term softness in the Aviation segment performance. “These businesses serve a combination of federal and military agencies, and heavy-duty cycle commercial trucking customers, all of whom represent a steady book of business for VSE.” To that end, management highlighted that within the last 30 days, they have announced more than $115M in contracts and awards with customers in both segments, which will contribute to results beginning in Q2.
Those contract wins include:
April 13th – Announced approximately $90M in contract and delivery order awards with the United States Department of Defense. These awards include the following: A five- and one-half-year contract, commencing in the 2nd Quarter, to provide procurement and technical support services for the Marine Corps Advanced Amphibious Assault family of vehicles, and Delivery Orders to provide services under VSE’s Foreign Military Sales contract with the Naval Sea Systems Command International Fleet Support Program Office.
April 27th – Announced a one-time $26.6M order for COVID-19 related supplies for a United States government customer in conjunction with ongoing efforts to respond to the global outbreak of the novel coronavirus infection. VSE anticipates weekly shipments to commence soon, with delivery of all supplies completed during Q2 or Q3.
May 13th – Announced approximately $44M in task and delivery order awards with the United States Department of Defense, with work expected to begin in the second quarter of 2020. These awards include the following: A 39-month task order for new work under the Contractor Field Team program to provide flight line operations and aircraft maintenance and maintenance support to the Commander, Naval Air Forces Atlantic Fleet Replacement Squadron at Naval Air Station Jacksonville, Florida for Boeing P-8 Poseidon and Lockheed P-3 Orion aircraft.
Analyst Commentary
Yesterday, Benchmark analyst Josh Sullivan initiated coverage on the name with a Buy Rating and $36 Price Target saying that the downside related to the aviation exposure (30% of sales) is currently baked in the stock price. However, the remaining 70% of the company that is primarily exposed to government customers as well as a growing e-commerce commercial platform provides a backstop.
They would add that CEO John Cuomo, who joined in April 2019, was already executing aviation market share gains with 18% Y/Y revenue growth in Q1. Large OEM’s such as Boeing/Airbus are forced to pull back on aerospace aftermarket initiatives to focus on core operations, and many smaller aerospace aftermarket operations likely will not survive the COVID-19 disruptions. Benchmark believes Mr. Cuomo’s experience running distribution at Boeing/KLXI/BEAV coupled with the disruption in the aviation aftermarket sets up a perfect storm for VSEC to take significant long-term share.
Finally, the analyst would comment that the company is a “Fleet Disruptor” with Analytics margin upside. More specifically, “VSEC’s just-in-time inventory management solutions are increasingly attractive especially as customers look to conserve cash. However, margin expansion will come from in-house design/reverse engineering. VSEC has extensive experience with the USPO trucks both managing the JIT inventory as well as offering redesigned parts based on operational learning analytics. Therefore, as the Fleet segment grows new unique customer sets, such as with sanitation trucks, it can learn from wear trends and offer in-house proprietary brake-pads, parts, etc., which lower customer costs and provide higher margins.”
