Why Amentum Holdings Stock Just Crashed

Amentum reported Q1 sales of just over $3.2 billion, a 5% year-over-year decline that missed consensus of $3.3 billion, while posting a non-GAAP EPS beat of $0.52 and GAAP EPS of $0.18 (up from $0.05 a year ago). Improved margins lifted operating income about 5% and diluted profits roughly 260%, but free cash flow was negative $142 million for the quarter. Management reiterated full-year guidance for sales up to $14.3 billion (≈3% growth), adjusted EPS around $2.35 (+/− $0.10) and FCF near $550 million (≈12% growth); at a $12.6 billion enterprise value this implies ~23x EV/FCF, which the author views as rich and rates the stock a sell.

Analysis

Market structure: Amentum’s mix (Q1 sales -5% but margin expansion) signals near-term revenue pressure but durable pricing on higher-margin nuclear services; direct winners are long-cycle nuclear contractors and engineering firms with secured backlog, losers are pure-play services with weak working-capital. At a $12.6bn EV and ~23x EV/FCF on management’s $550m FCF target, the stock is priced for ~12% growth — brittle to any FCF slip; credit spreads and short-dated implied volatility should widen if cash burn persists.

Risk assessment: Tail risks include large contract cost overruns, UK/France regulatory delays, or a government budget pause that would cut backlog conversion (low-probability but >10% portfolio-impact). Immediate risk (days-weeks) is further guidance drift or Q2 sales misses; medium-term (3–12 months) is FCF recovery failure given Q1 -$142m cash burn; hidden dependency: working-capital timing and milestone payments that can flip FCF violently.

Trade implications: Tactical short bias on AMTM is justified while valuation >20x EV/FCF and guidance is modest — favor capital-limited bearish option structures (3–9 month put spreads) sized 1–2% portfolio. Pair trades: short AMTM vs long defensible backlog names (e.g., LDOS/J for defense/infrastructure exposure) to neutralize macro risk; rotate incremental equity from AMTM into higher-growth, cash-generative names (NVDA) on 3–6 month view.

Contrarian view: Consensus underweights the value of secured nuclear contracts — if backlog conversion accelerates, a 10–20% recovery is plausible within 6–9 months, making current sell-off partially overdone. However, given cash-burn volatility and high EV/FCF, any long should be valuation-contingent (reprice to <18x EV/FCF) and tied to observable milestone delivery; prepare for idiosyncratic execution risk and activist interest as a wildcard.

Key Decisions for Investors

• Establish a tactical bearish position on AMTM equal to 1.5% of portfolio via a 6-month put spread (buy 6-month 25% OTM puts, sell 6-month 15% OTM puts) to limit capital at risk while capturing a >15% downside scenario; cover if company reports sequential sales growth >3% and raises FCF guidance above $650m.
• Initiate a 2% long in Leidos (LDOS) or Jacobs (J) against a 1.5% short in AMTM (pairs trade) to capture relative outperformance from steadier backlog/FCF profiles; rebalance if spread narrows by <50% or after 2 consecutive quarters of AMTM FCF beats.
• If long AMTM shares, buy 3–6 month ATM puts sized to 50% of the long position (protect 6–9 months of downside) and sell covered calls 10–15% OTM if implied vol falls below historical 90-day realized vol by >20% to generate income.
• Rotate 2–3% of equity exposure away from AMTM-sized positions into NVDA (long) on a 3–6 month horizon to favor higher revenue/FCF growth; only execute if NVDA pullback >5% from the prior week’s close to improve entry price.