Alliant Techsystems Inc.
/ (ATK-NYSE)Equity Research / ATK | Page 7
Current Recommendation / NEUTRAL
Prior Recommendation / Outperform
Date of Last Change / 06/29/2014
Current Price (01/29/15) / $132.71
Target Price / $139.00
SUMMARY
In the third quarter of fiscal 2015, Alliant Techsystems Inc. reported mixed results – earnings per share surpassed the Zacks Consensus Estimate while revenues missed the same. On a year-over-year basis, the bottom line improved primarily on the back of a decrease in share count and higher revenues. The company is currently in the process to merge its Aerospace and Defense Group segments with Orbital Sciences Corporation. The company’s stable order book, significant development for few critical projects under the aerospace operations and steady focus on expanding product portfolio will support its cash flow generation. However, we are concerned about program execution risks and over-dependence on raw material suppliers, which might deter its growth substantially. Thus, we are maintaining our Neutral recommendation on the stock.Equity Research / ATK | Page 7
SUMMARY DATA
52-Week High / $156.6652-Week Low / $101.76
One-Year Return (%) / 2.29
Beta / 0.79
Average Daily Volume (sh) / 365,651
Shares Outstanding (mil) / 32
Market Capitalization ($mil) / $4,247
Short Interest Ratio (days) / 2.23
Institutional Ownership (%) / 87
Insider Ownership (%) / 1
Annual Cash Dividend / $1.28
Dividend Yield (%) / 0.96
5-Yr. Historical Growth Rates
Sales (%) / N/A
Earnings Per Share (%) / 2.3
Dividend (%) / 32.1
P/E using TTM EPS / 11.6
P/E using 2015 Estimate / 11.5
P/E using 2016 Estimate / 10.8
Zacks Rank *: Short Term
1 – 3 months outlook / 3 - Hold
* Definition / Disclosure on last page
Risk Level * / Average,
Type of Stock / Large-Blend
Industry / Aerosp/Def Eq
Zacks Industry Rank * / 112 out of 267
RECENT NEWS
Alliant (ATK) Beats Earnings Estimates on Lower Share Count – Jan 28, 2015
Alliant Techsystems Inc. reported third-quarter fiscal 2015 adjusted earnings of $3.02 per share, surpassing the Zacks Consensus Estimate of $2.89 by 4.5%. Quarterly earnings increased 5.2% year over year primarily on the back of a decline in share count and higher revenues.
The company’s quarterly GAAP earnings per share were $1.43 compared with $2.46 a year ago. The difference between adjusted and GAAP earnings was due to the combined per share effect of a goodwill/trade name impairment charge of $1.50 and transaction cost of $0.09.
Total Revenue
In the quarter under review, total revenue came in at $1,251.4 million, missing the Zacks Consensus Estimate of $1,252 million marginally. The reported revenues, however, exceeded the year-ago figure by 3.6% primarily due to higher contribution from the Defense Group (2.4%) and Aerospace Group (2.1%) segments. This was partially offset by a lower contribution from Sporting Group segment (3.3%).
Operational Highlights
In the third quarter of fiscal 2015, Alliant’s orders decreased to $1 billion from $1.3 billion a year ago due to lower orders in Aerospace Group and Sporting Group. The company’s backlog stood at $6.7 billion.
Cost of sales increased 3.1% year over year to $947.5 million in the reported quarter.
The company reported gross profit of $303.8 million in the quarter, up 5.1% from the prior-year level.
Total operating expenses increased 2.6% year over year to $146.9 million, primarily due to higher research and development, and selling expenses.
The company’s interest expenses decreased 24.9% year over year to $21.4 million.
Financial Update
As of Dec 28, 2014, Alliant had cash and cash equivalents of $112.9 million compared with $266.6 million as of Mar 31, 2014.
Long-term debt, as of Dec 28, 2014, was $1,908.5 million versus $1,843.8 million in fiscal 2014 end.
During the first nine months of fiscal 2015, cash from operating activities was $154.2 million versus $222.3 million in the year-ago period.
Alliant’s capital expenditure was $92.0 million during the nine months ended Dec 28, 2014 versus $80.6 million in the prior-year period.
Business Update
On Jan 27, 2015, stockholders of Alliant approved the issuance of shares to the stockholders of Orbital Sciences Corporation in connection with a proposed merger. Orbital stockholders also approve of the merger. Upon customary approvals, Alliant expects to conclude the transaction on Feb 9, 2015.
VALUATION
Alliant Techsystems’ current trailing 12-month earnings multiple is 11.6, compared with the 43.0 average for the industry and the 18.4 average for the S&P 500. Over the last five years, the company’s shares have traded in the P/E multiple range of 5.5 to 14.2 trailing 12-month earnings. On a forward P/E multiple basis, the company is presently trading at a discount to its peer group and S&P 500.
Our target price of $139.00 reflects a P/E multiple of 12.1 based on fiscal 2015 earnings per share.
Key Indicators
Earnings Surprise and Estimate Revision History
NOTE – THIS IS A NEWS-ONLY UPDATE; THE REST OF THIS REPORT HAS NOT BEEN UPDATED YET.
OVERVIEW
Arlington, VA-based Alliant Techsystems Inc. is a premier aerospace and defense company. It has operations in the U.S. and overseas. The company supplies products to the U.S. government agencies and its prime contractors and sub-contractors. The company also supplies ammunition and related accessories to law enforcement agencies and commercial customers. It manufactures and sells a number of products to the aerospace and defense, and civilian markets including ammunition, solid fuel propellant systems, fuzes, composites, missile defense products and shooting and tactical accessories.
Alliant operates in three segments – Aerospace Group, Defense Group and Sporting Group. At the end of fiscal 2014, around 16,000 people were employed by the company, which generated annual revenues of approximately $4.78 billion.
Ø The Aerospace Group develops and produces rocket motor systems for human and cargo launch vehicles, missile defense interceptors, small and micro-satellites, conventional and strategic missiles, structures and subsystems, satellite components, lightweight space deployable and solar arrays, flares illumination and aircraft countermeasures. The group also provides engineering and technical services and functions in military and commercial aircraft while launching structure markets. Under the group, the company has three reporting units – Aerospace Structures, Space Systems Operations and Space Components.
Ø Defense Group, which includes Armaments Systems, Missile Products, Defense Electronic Systems and Small-Caliber Systems. Under the group, the company develops and produces small, medium and large caliber ammunition, precision munitions, gun systems, propulsion systems for tactical missiles and missile defense applications, strike weapons, aircraft survivability systems, fuzes and warheads, special mission aircraft, and propellant and energetic materials.
Ø Sporting Group, through its Accessories, Ammunition and Firearms units, develops and produces commercial products and tactical systems and equipments.
Source: Company
On Apr 29, 2014, Alliant announced that its board of directors has unanimously approved a plan to form two independent public entities. Per the plan, the company will spin off its outdoor sports operations and the division will operate as an independent company. In addition, Alliant will merge its Aerospace and Defense Groups with Orbital Sciences Corporation. The second one will act as Orbital ATK, Inc. The transaction is expected to be completed by the end of 2014 and subject to approvals.
The spinoff will be followed by a tax-free, all-stock merger between Alliant’s Aerospace and Defense Groups and Orbital Sciences Corporation, pursuant to which the shareholders of Orbital will obtain shares of Alliant common stock as consideration. Current shareholders of Alliant will own around 53.8% in Orbital ATK on a fully-diluted basis while those of Orbital will own roughly 46.2%.
REASONS TO BUY
Ø Alliant continues to act as a trusted partner on several National Aeronautics and Space Administration (NASA) programs. The company also provides the U.S. defense forces numerous products and services. Alliant is on track with its Space Launch System (SLS) program and several other projects. During the second quarter, the company successfully completed a critical design review for NASA's SLS booster and provided an American commercial solid rocket solution to the U.S. Air Force as a replacement of the Russian RD-180 engines. Previously, Alliant had completed an important structural test of the booster's main attachment mechanism. Given Orbital Sciences Corporation’s significant presence in the U.S. space domain, proper integration of its functions with Alliant’s aerospace business will enable the joint entity to expand its scale of operations substantially, thereby realizing profitable synergies.
On the other side, Alliant is a well-diversified defense contractor, delivering products and solutions that are essential to safeguard the U.S. national security. The company is the sole source supplier of various calibers of ammunition to the U.S. Department of Defense (DoD). Alliant’s steady effort on expanding product portfolio will enable it to provide superior services to its customers.
Ø In addition, Alliant also works closely with international government agencies by delivering ammunitions and services. In fiscal 2014, the company reported $591 million as foreign sales, which was 12.4% of total revenues and also higher than the fiscal 2013 level. During the second quarter, Alliant, Finmeccanica-Alenia Aermacchi and the Italian Air Force had jointly completed the first phase of ground and flight testing of the fully-configured multi-mission MC-27J tactical transport aircraft. The company also delivered 2 AC-235 gunships to the Hashemite Kingdom of Jordan. A combination of domestic and international contract wins will enable Alliant to diversify its revenue mix and report double-digit margins in fiscal 2015.
Ø Alliant focuses on maximizing shareholder wealth through distributing dividends at regular intervals. During the first six months of fiscal 2015, the company paid around $20.4 million as dividends, up 22.5% from the prior-year payout. During the second quarter, Alliant utilized around $338 million to purchase roughly $187.6 million of its outstanding 3% convertible notes. Buyback of senior notes will help the company to reduce its interest burden, thereby improving margins. Though Alliant did not repurchase any shares of its common stock during the quarter, the company frequently utilizes funds to buyback shares. In fiscal 2014, the company repurchased 609,922 shares for around $53.3 million under its $200 million share repurchase program. These initiatives will collectively enable Alliant to retain investors’ interest in the stock.
REASONS TO SELL
Ø The performance of defense companies depends primarily on upgrading technologies, innovating research and development programs, and possessing a skilled workforce. The products and services required by Alliant’s government and commercial customers are changing and advancing rapidly. If the company fails to constantly come up with innovative products that meet these changing needs and train existing employees in modern technologies and retain qualified professionals, the company will be unable to compete with its peers.
Apart from facing threats from other defense majors, a reduction in the budget proposed by the DoD for fiscal 2015 is a cause of concern. Like other defense companies, Alliant might experience order cancellations, non-renewal of existing agreements or lack of fresh contracts from the U.S. defense establishments, subsequently impacting its cash inflow.
Ø Alliant’s increased penetration into the commercial aerospace market might pose serious challenges including higher capital expenditures, performance risk, schedule delays, widened payment terms, added credit risk associated with new customers and costs incurred in competing with large-scale companies.
Ø Alliant utilizes several raw materials including steel, copper, zinc, aluminum, natural and synthetic rubber compounds, acrylonitrile, ammonium perchlorate and other substances to produce various products. Rising price of raw materials, interruptions in supply and delay in replacement of materials or delays in adding new raw material suppliers could have an adverse impact on the company’s results, going forward.
DISCLOSURES & DEFINITIONS
The analysts contributing to this report do not hold any shares of ATK. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts’ personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts’ compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1056 companies covered: Outperform - 16.7%, Neutral - 77.0%, Underperform – 5.6%. Data is as of midnight on the business day immediately prior to this publication.
Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company’s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock’s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively.