I've been researching Alliant Techsystems (ATK) some over the last couple weeks. I have more thorough notes elsewhere, but I want to get started so I'll just go off of what I remember for now and update accordingly.
ATK (as it is currently structured) operates with 3 business segments - aerospace, defense, and sporting. Each of these divisions is then broken down into multiple sub-divisions. ATK is involved in a vast array of products ranging from rocket motor systems involved in space flight, satellites and satellite parts, small, medium, and large caliber ammunition, various missiles, etc. The sporting group targets a different consumer by producing commercial weapons, ammunition, and various accessories used in hunting, law enforcement, and sporting activities.
The company will soon be undergoing significant changes, as it has agreed to merge with Orbital Sciences while spinning off the Sporting Group. The new company will be known as Orbital ATK and trade under the ticker OA. The sporting group will be called Vista Outdoors and will be headed by ATK's current CEO.
ATK has been consistently profitable over the past 10 years, with margins expanding to (if i recall correctly) 10 year highs this past year - gross, operating, as well as net. They have been consistently FCF positive, and the EV/EBITDA ratio has expanded from below 6 in 2008 to now over 9.
It is obvious that ATK is a good business - but is it worth an investment at these levels?
ATK is heavily reliant on winning contracts from both US and foreign governments. The very nature of the bidding process means that margins are under constant pressure. Coupled with the US budget situation, contracts could become harder to come by. Defense spending has been cut, and it could very well continue to see cuts in the future.
The opposite side of the spectrum here is the potentiality for defense spending increases. There is always some turmoil in the world, but it seems to have increased lately. With the rise of ISIS, arming Syrian rebels, Ukraine/Russia and so on - the US and its allies may be forced to increase spending. Obama has repeatedly said 'no boots on the ground' which would mean more $ going to missile strikes.
Another item to consider is the resurgence of US space flight. Due to the situation with Russia, the US can no longer rely on Russian transport to space. New rockets and astronaut transport vehicles are needed - Boeing and SpaceX having just been awarded contracts to design the capsule yesterday. A continued increase in the interest of US space flight could provide a significant boost to ATK - especially post-Orbital merger, who has a better foothold in that particular area having already been awarded a contract to deliver supplies to the ISS.
A&D companies have always been of interest to me, and ATK is as well. But in terms of investment potential, I think there is not a large enough margin of safety for me. Military conflict and space exploration have been thrust into the public eye recently, but this could very well fade in the coming years. ATK/Orbital ATK should do just fine in any event given their track record, but I think eventually margins will begin to normalize which could hurt the price. I will continue to monitor and would start to take a more serious look if the EV/EBITDA dropped below 8.
My goal is to keep running tabs on companies that I 1. have interest in 2. can understand and 3. are investment candidates. ATK will be one of those companies.
Again, this has been written primarily from memory so some information may be incorrect. If I have any further thoughts to contribute, I will do so.
As always, happy investing,
Ben
