It is widely known that the U.S. government’s budget tightening is an upcoming challenge for the Aerospace and Defense industry. Still, Alliant Techsystems Inc. (ATK) has managed to stay profitable through the first quarters of fiscal 2014 and is projected to stay on this path.
ATK is a diversified company and U.S. government contractor, which produces aerospace, defense and commercial products. Its production is divided into three operating groups: the Aerospace Group, the Defense Group and the Sporting Group. The company produces a range of articles, which vary from rocket motor systems, to missiles and small satellites, engineering and technical services. In addition to that it manufactures a variety of armaments systems as well as small, medium, and large caliber ammunition. Furthermore, Alliant is pointed towards the commercial market, and produces tactical systems, equipments and other products.
The company’s diversified production, in addition to its competitive position in comparison to other industry peers, makes Alliant a great investment opportunity.
The Benefit of ATK's Competitive Position
Having to deal with competitors such as Astronics Cp (ATRO) or B/E Aerospace Inc. (BEAV), and being able to maintain a competitive position in the market, shows ATS´s ability for great evolution and profitable growth.
Alliant also benefits from a narrow economic moat. Having long-term contracts with its customers, that generate consistent revenue for years, is a great advantage. The long-term programs have high switching costs for the customer. For example, ATK produced the composite materials for the Hellfire missile for years.
In addition, leading the solid rocket propellant market should ensure increased annual revenue. The new Space Launch System (SLS), for which ATK is working with the NASA, is expected be as successful as the Space Shuttle program years ago.
Most important, Alliant is the biggest supplier of small-caliber ammunition for the U.S. military. Furthermore, ATK has managed to get new contracts in the U.S. military sector, such as the second full-rate production of the advanced anti-radiation guided missiles. This contract with the U.S. Navy was signed for a total of $102.4 million.
New Contracts and acquisitions should increase profitability
Alliant has developed a composite technology that brought in new customers such as Airbus Group NV (EADSY) and Boeing Co (BA). In addition, the company's composite material is required for the production of the F-35 jets. ATK produces around $1.8 million of the content in every F-35 jet that is constructed and generates $1.2 million worth of every A350.
New acquisitions create great expectations for shareholders, and this is the case of Alliant. The acquisition of Bushnell Group Holding Inc., that was completed in November of 2013, will amplify the customer base of Alliant´s Sporting Group even further, and is projected to increase earnings for the company.
Good Outlook for the Company’s Future Performance
The future looks bright for Alliant Techsystems Inc. The company´s financial position will improve due to a better operating margin, cash flow optimization and profit improvement. Furthermore, ATK´s debt was reduced by 20% from $1.02 billion to $820 million last fiscal year. This boosted the company´s performance, leading to an increased free cash flow estimate for fiscal 2014. The operating margin is currently 10.80%, 2.30% higher than the industry median.
Shareholders' wealth should also see an increase, given ATK´s share repurchase program and its debt reduction initiatives. In the second quarter of fiscal 2014, $16.7 million where distributed to shareholders in the form of dividends. The ROC of 30.40% also demonstrates why this company is a great investment opportunity. Gurus like Joel Greenblatt (Trades, Portfolio) have seen this opportunity and feel bullish about this stock. For all the above mentioned reasons, I project a profitable future with increased earnings for this company.
Disclosure: Victor Selva holds no position in any stocks mentioned.