ATK

Alliant Techsystems is a defense contractor that specializes in producing ammunition and propulsion systems. Defense is not a growth industry and indeed it is very likely that it will shrink as/when the US government is finally forced – willingly or unwillingly – to reduce spending. That said, ATK has a very strong cost-advantage in producing what is an obvious necessity in any defense budget and one that is a relatively small item overall. Big new programs/platforms can be cancelled or postponed but without ammo a soldier is useless. It appears to me that the risks of dependence on government contracts, growth headwinds, and even the risk of the government diversifying ammo suppliers, are incorporated in the current stock price. A NASA contract for the Ares program was cancelled earlier this year (accounting for 10% of sales) but the stock price has been overly hammered (down 33% from its peak).

Valuation: ATK is selling at far lower valuations (P/E= 8; PBV=2.6; PS=0.4; PCF=11) than at any time in the last 10 years. Current stock price ($64) is comparable to Mar 2009 stock price ($62). While a credit crunch (or fears about such) may well reoccur in the private sector — there is zero possibility of a government contractor experiencing such a thing. At current price, ATK is pricing in a very high probability of future contract cancellation — with no evidence that any such thing is being contemplated.

Management: Has done a very good job of investing for growth. A fair job of diversifying its revenue stream. A good job of managing margins and operating efficiency. A poor job of rewarding shareowners thru dividends and/or share buybacks at favorable prices. A fair/poor job of managing balance sheet (debt is a bit high — and too much of it is convertible debt) but there are no near-term liquidity risks to the balance sheet. Corporate governance is good relative to other public companies.

Shareownership: Insider ownership is low. Institutional ownership is highly-rated and composed mainly of value investors and GARP investors. Few momo and relatively few index shops.

Technicals: Currently bearish but not any more bearish than other equities. Don’t really expect anything to change until it finds a value bottom. In ATK’s case, that value bottom may be a lot nearer than other equities.

Summary: Not sure there is a near-term catalyst to move the stock price but there is some value here. And if there is a “double-dip” or some other Wave 2 deleveraging, ATK provides a revenue stream that is very noncorrelated and different. So a possible portfolio diversifier.

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