Raise your hand if you’ve ever heard of V2X (VVX -4.75%), the small-cap defense company formed from the merger of defense contractors Vectrus and Vertex Aerospace in 2022?

Yep. That’s about what I expected. Even among investors, V2X is the farthest thing from a household name. But it’s a name defense investors in particular might want to start paying attention to. Because on July 31, V2X scored a new Pentagon defense contract worth $4.3 billion — and V2X itself costs only $1.8 billion.

Image source: Getty Images.

Introducing V2X

I admit, the first time this company caught my eye was on July 31, when the company’s name (or rather, one of its component companies, Vertex) appeared at the very top of the list of the most valuable contracts awarded by the U.S. Department of Defense that day.

“Vertex Aerospace LLC, Madison, Mississippi, was awarded a maximum $4,322,844,989 value, indefinite-delivery/indefinite-quantity contract for the contractor operated and maintained supply service contract for the T-6 [training jet] aircraft,” read the announcement, before going on to explain that V2X beat out two other bidders to win the contract, and that the $4.3 billion will be doled out over the course of the next 10 years (ending on July 31, 2034).

Further digging revealed that this isn’t the only gigantic contract on V2X’s plate, however. In fact, just last year, my fellow Fool Eric Volkman spotlighted a similarly significant win by V2X, when the company landed a $3.7 billion, five-year contract to provide “readiness capabilities” to the U.S. Army, by supporting the operation of training devices, simulators, and simulations.

In fact, averaging out to $740 million per year, that contract is arguably even more significant than last week’s $4.3 billion win, which will be worth “only” $430 million per year over its decade duration.

“A billion here, a billion there — pretty soon you’re talking real money”

So… $4.3 billion here, and $3.7 billion there. It seems to me we’re already talking about “real money” that V2X is earning off the Pentagon — $8 billion total, won via just two contracts, over the course of just two years.

But if V2X is rolling in so much Defense Department dough, one wonders, why is it that the stock looks so seemingly cheap at a market capitalization of just $1.8 billion?

Is V2X stock cheap?

Well, let’s start with sales. V2X took in $4.3 billion in revenue last year, up 9% from 2023 — a respectable growth rate for a defense contractor, if perhaps a bit on the slow side for a small-cap defense contractor. What’s more, V2X earned less than $35 million in profit on those sales.

That’s a net profit margin of less than 1%. Which is to say, pretty slim.

If we apply this margin, then, to the extra $430 million a year V2X will be bringing in from its latest multibillion-dollar contract win, therefore, it’s likely to boost V2X’s annual earnings by less than $10 million. That’s not a lot of money with which to move the needle on a $1.8 billion market capitalization.

Is V2X stock a buy?

Now, the good news is that V2X seems to be getting more profitable as its merger matures, and cost synergies between the two merged businesses, Vectrus and Vertex, work their way through the company. Over the last six months, for example, V2X earned $30.5 million, which is to say nearly as much as it earned in all of 2024. As profitability improves, analysts polled by S&P Global Market Intelligence estimate V2X might earn as much as $73 million this year, and generate $135 million in positive free cash flow.

Assuming the analysts are right, this would value V2X stock at 24 times current-year earnings, but only about 13 times current year free cash flow. That doesn’t sound like a lot, but with profits only growing 9% a year, and V2X paying no dividend, it’s not necessarily cheap enough to tempt me to buy the stock right now.

The big question for investors is whether V2X can continue improving its profit margin, and perhaps accelerate its earnings growth into the double digits. Many analysts believe the company can accomplish this, forecasting that per-share profits, for example, might double over the next three years — and that free cash flow might nearly double in two.

I don’t know enough about the company right now to say how likely this is, but now that I’m alerted to V2X’s existence — and impressed by its last two massive contract wins — I’m certainly interested enough to keep following the story, and learning if V2X can deliver on these lofty predictions.

And as soon as I know the answer to that… I’ll let you know, too.