VEC - Vectrus (VEC) - Sell-off Overdone - Favorable Risk Reward

Sell-off Overdone. VEC shares are off approximately 21% since the announcement of the Vertex combination. We believe this reaction to be overdone, presenting investors a favorable risk/reward opportunity. Assuming 31.6 million shares outstanding after the combination and $1.1 billion of debt, at our $62 price target, the combined entity would trade at 10.8x 2021 pro forma adjusted EBITDA and 0.9x pro forma revenue, multiples still below its peer group. Moody's Upgrade? On Tuesday, Moody's placed all ratings of Vertex on review for upgrade, stating "Moody's recognizes the strategic rationale for the transaction, as the combined companies will enhance their technology and service capabilities, while increasing scale and expanding the bid pipeline." Moody's does point out integration risk, heightened by Vertex's acquisition of the Raytheon businesses, but all mergers have some degree of integration risk and Vectrus has successfully integrated past acquisitions, including four in the past four years, albeit not of this size.On A Winning Streak. Just in the past couple of years, Vectrus won two AOR's under the LOGAP V construct, successfully re-competed for the OMDAC-SWACA contract, was awarded the $250 million Ft. Benning contract, won a position on the $4.6 billion AFCAP V contract, and the GSA IDIQ, to name some of the major wins. Many of these competitions included peers much larger than Vectrus. The Company has been, and we are confident will continue to, "punch above its weight."Maintaining Outperform. We are maintaining our Outperform rating and $62 twelve month price target. We believe the Vertex acquisition to be transformative, creating a global leader in mission-essential solutions. With the acquisition, the combined entity will play in an even larger pool with market trends supporting growth in the converged infrastructure market. Read More >>