VSE Corp Shares Back on Positive Trajectory as Q1 Results and Sale of Federal & Defense Unit Lift Investor Interest

Strong first-quarter results and news of a divestment pushed shares of VSE Corporation (US:VSEC) up almost 24% on Tuesday. The move recovered most of the losses incurred after the previous Q4 result update in March.

The provider of aftermarket distribution and maintenance, repair, and overhaul services for air, land, and sea transportation assets for commercial and government markets, said that it entered into an agreement to sell its Federal and Defense segment for a total consideration of up to $100 million.

The Q1 results were strong, with total revenues growing 10.5% to $255.4 million topping market expectations for $240 million. Adjusted EBITDA also saw a significant increase of 18.5%, reaching $26.3 million and beating consensus of around $21 million.

Ahead of Forecast

On an adjusted basis, the bottom line net income increased by 16.3% over the year to $10.7 million equating to EPS of $0.83, well ahead of the $0.55 market forecast.

A chart from Fintel shows VSEC’s earnings EPS surprise and miss track record in recent years and highlights how significant Tuesday’s beat was.

VSE’s Aviation segment, in particular, had a record revenue of $113.2 million in Q1 2023, which was a 21% year-over-year increase. The segment also more than doubled its operating income from $7.6 million to $5.7 million. The sales improvement was credited to market share gains in the business and general aviation (BG&A) market and was supported by the continued global air traffic recovery.

The sale of VSE’s Federal and Defense business segment is intended to reshape and transform the company’s future by refocusing resources and advancing its strategy in its two core segments — Aviation and Fleet.

The divestment will enable VSE to create a 100% pure-play aftermarket business that focuses on higher-margin commercial MRO and distribution services in fragmented and growing end markets.

VSE President and CEO John Cuomo stated that this refocused strategy would drive greater long-term shareholder value.

Cash Improvement

The divestment should help VSEC improve cash generated from operations which is currently at its lowest point in the last year.

VSE CFO Steve Griffin stated that the net proceeds from the sale would be used to reduce borrowings and pursue strategic, tuck-in acquisitions in the Aviation segment, which represents over 60% of trailing twelve months revenue and profit following the sale of the Federal and Defense business segment.

VSE’s Fleet segment also saw a year-over-year revenue increase of 12% to $75.4 million in Q1. Revenue from commercial customers increased by 17% over the year, driven by growth in commercial fleet and e-commerce customers. Commercial revenue represented 43% of total Fleet segment revenue in the period and the USPS revenue contribution grew 14% over the year driven by legacy fleets.

Analysts Cheer

Truist Securities analyst Micahel Ciarmoli cheered the divestment and quarterly results, raising his ‘buy’ call target price from $60 to $67. The analyst told investors that the divestment will create an aftermarket pure play that should help the stocks multiple re-rate modestly higher.

Ciarmoli also mentioned he thinks the current strength in the aviation segment is sustainable and thinks there could be further upside to the current guidance.

Fintel’s consensus target price of $58.90 suggests analysts think the stock could rise a further 11% over the next year.

Options Premium Sold

Fintel’s options data for VSEC highlighted that a large portion of net premium was sold in the market before the release of the announcement. Some of this volume was likely covered today in the significant amount of net long premium purchased today.

This article originally appeared on Fintel

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