$56.98
$149.56
bear $56.98
base $105.81
bull $149.56
margin of safety $55.00
market price* $164.08
VSE Corporation is now purely an aviation aftermarket business. It distributes replacement parts for original equipment makers and repairs engine components, accessories, fuel controls, avionics, hydraulics, wheels and brakes for business and general aviation, helicopter, commercial engine, cargo and defense customers. It got this shape in three steps. It sold its federal and defense services business in 2023 and its Fleet (truck parts) segment in April 2025. Then on May 5, 2026 it closed the $2.025 billion purchase of Precision Aviation Group (PAG), paying about $1.75 billion in cash and 1.42 million shares, plus an earn-out of up to $125 million tied to PAG's 2026 results. PAG adds roughly half again to revenue: about $615 million a year, on top of about $1.22 billion for VSE including Aero 3 (wheels and brakes, bought December 2025). In 2025, 57% of revenue was billed in the United States and 13% in Canada; the rest came from other countries. One group of affiliated customers under common ownership made up 20% of 2025 revenue. EARNING POWER. The company's ten-year cash record describes a business that no longer exists, so we measure from the transformation. We built today's earning power from its parts. The first part is the aviation business's 2025 results with Aero 3 counted for the full year: about $157 million a year of cash before interest, after taxes, stock compensation and the capital spending needed to keep the business as it is. The second part is PAG, at about $89 million. That comes from its roughly $615 million of revenue at a margin consistent with the price paid, trimmed for costs the seller's adjusted figures leave out. Together that is about $246 million a year before interest, or about $7.70 per share. The share count is about 32 million diluted shares, which includes the shares owed under the tangible equity units issued in February 2026. First-half 2026 pro forma results (combined revenue of $985 million) point to a somewhat higher run rate. They support this level but do not raise it. The $15 million of PAG cost savings management expects is not included. Our earlier estimate was made before the PAG purchase closed and on a different basis, so it is not comparable. ACCOUNTING JUDGEMENTS. Reported 2025 earnings were held down by a $47 million loss on the Fleet sale and a $29.2 million write-down of the earn-out receivable from that sale. Both are non-cash and will not recur, so we add them back. Cash from operations has run far below earnings. It was negative in 2021, 2023, 2024 and the first half of 2026, because inventory grew quickly to stock new distribution contract wins and newly acquired businesses. Inventory was $554 million at the end of 2025, roughly 45% of a year's revenue. We count this as investment rather than lost earning power, but we charge for it wherever we credit growth: in every case, each extra dollar of revenue costs 55 cents of working capital. After PAG, amortization of acquired intangibles runs at roughly $85-90 million a year. These are customer relationships and distribution rights that wear out, so no case lets earnings grow forever, and the base and bear cases shrink after year ten. BASE CASE. Revenue and cash flow grow 2.5% a year for ten years. That growth comes from the original equipment makers' list-price increases, which the business passes on, and from the exclusive PT6 fuel-pump license signed in December 2025. No market growth, share gains or cost savings are credited, and the working capital this growth needs (about $25 million a year) is charged. Year one assumes 2.5% growth, compared with 34% growth in per-share cash flow before interest in 2025, which came mostly from acquisitions. After year ten, cash flow falls 1% a year as acquired distribution rights roll off. On this path the business is worth about $4.34 billion. It owes about $950 million: the $900 million term loan due May 2033 (floating, currently about 5.6%), $67 million of amortizing notes from the equity units and the $34 million earn-out liability, less cash beyond operating needs. That leaves about $3.39 billion, or about $106 per share. BEAR CASE. A business-aviation downturn as deep as 2008-2010, when business jet flying fell by about a fifth and took years to recover. Revenue falls about 20% over two years. Because repair shops carry heavy fixed costs, cash flow drops to 55% of today's level at the trough (about $135 million). It recovers only to 88% of today's level by year six, because some business with the 20% customer group and a distribution line are lost for good. After year ten, cash flow shrinks 3% a year. This case also reflects VSE's record of writing off businesses: about $138 million of impairments, losses on sale and write-downs since 2020. At the trough the business still covers its roughly $54 million of interest about 2.5 times. But net debt would be about five times trough operating earnings before depreciation. That could breach the revolving credit covenants (the term loan has none) and push the company to issue shares, as it has often done. The business is worth about $2.77 billion, owes $950 million and leaves $1.82 billion, or about $57 per share. BULL CASE. The company's own levers work. Revenue grows 6% a year for five years and 4% for the next five, below the double-digit growth of recent years. The $15 million of PAG savings is fully achieved by year three, working capital is still charged at 55 cents per new revenue dollar, and cash flow holds flat after year ten. PAG earns the full $125 million earn-out, which adds to what is owed. The business is worth about $5.83 billion, owes about $1.04 billion and leaves $4.79 billion, or about $150 per share. WHAT COULD MAKE THIS WRONG. VSE paid a full price for PAG, and the combined business has never reported a full year. Inventory may keep absorbing cash faster than revenue grows. The term loan floats, so higher rates would raise interest costs. Shareholders have also been diluted heavily: diluted shares went from about 10.8 million in 2016 to about 32 million today. MARGIN-OF-SAFETY PRICE. We are moderately sure of the earnings level. The 2025 aviation results are audited, and PAG's revenue is confirmed by the pro forma figures in the 10-Q. But PAG's margin rests on the seller's adjusted numbers, and the combined business has no full-year record. The worst plausible event is a deep business-aviation slump while debt is still about three times earnings. The term loan has no maintenance covenant and does not mature until 2033, so the company should survive it, but shareholders could be diluted at a bad moment. Suppose PAG earns about $25 million a year less than we assume and inventory soaks up 80 cents of every new revenue dollar: the base value then falls to the high $80s. The dividend is $0.40 a year, so almost nothing is paid over the holding period, and the return has to come from the value being recognised within three to four years. At $55 a share, the price equates to about $2.7 billion for the whole business including its debt, about eleven years of today's cash flow before interest. In the bear case the business is still worth slightly more than that. From $55, the base case implies 20% a year if the shares come to reflect roughly today's base value within about three and a half years, which leaves room for value to fall short of the base case or take longer to show. The margin-of-safety price is $55.