February 19, 2021 - 4:51pm EST by
2021 2022
Price: 37.27 EPS 2.80 3.43
Shares Out. (in M): 13 P/E 13 11
Market Cap (in $M): 466 P/FCF 11 10
Net Debt (in $M): 202 EBIT 59 69
TEV (in $M): 668 TEV/EBIT 11 9

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VSE Corporation (VSEC) is an undervalued “mini-conglomerate” with several strategically valuable aftermarket businesses whose value is not appreciated by the market.  The company has historically been undermanaged and underfollowed.  VSEC is well-positioned to create significant value over the next several years with a new high quality CEO.

VSEC is a $473MM market capitalization, $675MM enterprise value diversified service and supply chain management company that aids clients in sustaining, extending the service life, and improving the performance of their transportation equipment, other assets and systems.  VSEC provides logistics and distribution services for legacy systems and equipment and professional and technical services to the U.S. Government including the Department of Defense (DoD), the U.S. Postal Service (USPS), federal civilian agencies and commercial customers.  VSEC’s largest historical customers have been the DoD as well as the USPS.  Operations include supply chain management solutions, parts supply and distribution, and maintenance, repair and overhaul (MRO) for vehicle fleets, aircraft, systems and equipment.

The investment thesis for VSEC is based on the following points:

1.      VSEC is an attractive value – trading at 8.2x “depressed” LTM EBITDA and at an enormous discount to any reasonable SOP analysisThe stock is undervalued on LTM numbers and is likely to see a meaningful rebound in their Aviation segment as airline miles traveled increase. Using discounted multiples in a SOP analysis points to immediate upside of $55 to $61.  The key point is this – from a depressed starting point using LTM numbers - comparable valuations imply 45-62% immediate upside and reasonable forward looking assumptions point to a potential double in 3 years.

2.       VSE has robust and established market positions supporting mission-critical applications that have sustainable and enduring value.  VSE is the type of business that if a buyer purchased and closed his or her eyes for a decade – absent gross mismanagement – the business would still be producing cash and a reasonable ROIC ten years later.  These are sustainable, 100% aftermarket businesses with low risk of obsolescence, minimal capital intensity, with upside optionality due to the currently depressed nature of the Aviation business and M&A opportunities.

 3.      VSE has a strong CEO with a history of value creation.  VSEC CEO John Cuomo took the position on April 15th, 2019.  John previously served as the VP and General Manager of Boeing Distribution Services.  He joined Boeing through the acquisition of KLX Aerospace, where he served as General Manager of the business.  The history here is that the business was spun-off from B/E Aerospace, grown successfully and profitably, and then sold in a home run transaction to Boeing.  Boeing acquired the business in May of 2018 for $4.3B, equivalent to 15.7x trailing EBITDA and 14.3x estimated 2018 EBITDA.  Cuomo, 46, held multiple positions at KLX/BE for 14 years but he ran the Aerospace Solutions business its entire time as the primary subsidiary of a public company from 2014 through 2018.  He was responsible for the acquisition and integration of 10 different businesses with a combined value of $1.5B.  Our primary research checks on Cuomo were outstanding – "strategic thinker, strong leader, understands numbers, robust analytical skills."  Historically VSE has been an orphaned security.  They have had minimal institutional coverage and held no conference calls.  VSEC has begun to conduct quarterly conference calls and increase shareholder outreach.  Strategically, Cuomo wisely divested the company’s Prime Turbines & CT Aerospace subsidiaries and has built out a strong management team.  The company has signed several high quality distribution deals with OEMs in the Aviation segment, has sharpened their bidding process in the Federal business, and has grown their non-USPS business significantly within the Fleet subsidiary.  In January, VSE raised $50MM in a secondary due to the fact that Cuomo sees multiple acquisitions in the Aviation area.  I expect significant top and bottom line growth through both organic growth and M&A over the next several years.

Business Summary

VSE Corporation helps customers maintain their assets through core offerings in supply chain management, MRO equipment refurbishment, logistics and engineering.  The company also provides IT solutions and energy consulting services.  VSE manages the business through three separate segments:  The Aviation segment accounted for 26% of LTM revenues and 18% of EBITDA, the Fleet segment accounted for 33% and 49% and the Federal & Defense segment accounted for 42% and 33%.

Aviation - The Aviation segment generated $170MM in sales and $14.5MM in LTM EBITDA.  For perspective, in 2019 the segment generated $226MM in revenues and $30.3MM in EBITDA.  COVID-driven softness has masked underlying growth and share gains.  In fiscal 2019, the segment increased revenues 54% and 11% on an organic basis and 1Q20 (pre-COVID) Aviation generated 18% organic revenue growth.  The segment has outperformed industry numbers and maintained profitability throughout the downturn.  Aviation provides parts supply and distribution, supply chain solutions and maintenance, and repair & overhaul (MRO) services for commercial and general aviation jet aircraft engines and engine accessories.  The group offers a range of complementary services and supplies to a diversified base of commercial airlines, regional airlines, cargo transporters, MRO integrators and providers, aviation manufacturers, corporate and private aircraft owners and some agricultural clients.