Alliant Techsystems: De-Risking And Focusing On Performance

Although Alliant Techsystems' (ATK) Q2 results were bolstered by the strength in the Sporting Group division, overall revenues took a hit from the Radford contract loss and slower NASA sales. Importantly, contract wins in the period have substantially de-risked the investment case and provide enough positive momentum in H2 for increased FY13 guidance with sales up marginally and mid-point EPS up 6%. Given the difficult environment over the past 18 months with uncertainty and increasing competition, we feel Q2 provides reassurance, supported by a $6.4bn backlog, while growth opportunities remain in the Sporting and Aerospace divisions.

Q2 results: Fighting the Radford hangover
The loss of the Radford Army Ammunition Plant contract caused top-level Q2 sales to decrease by 4% to $1.1bn and operating profit to fall 25% to £110m. Excluding this, sales were actually up 2% with Defense (ex Radford and a favourable contract resolution) up 5%, driven by small caliber systems, Aerospace declined 7% due to lower NASA and commercial aerostructure revenues, while Sporting was up 11% driven by both ammunition and accessories. Underlying margins dropped to 10.3% due to increased pension expense and negative sales mix in Defense. With underlying difficult conditions, we view this as a robust set of results.

Outlook de-risking and focusing on performance
After several significant strategic wins during H1, including contracts on Airbus A400m and A350, a 10-year award of the Lake City Ammunition Plant contract and the move to full rate production on AARGM, ATK’s future now looks more positive. While there are still uncertainties over potential sequestration, ATK’s moves to improve efficiency, strengthen the balance sheet and deliver improved costeffectiveness to customers are seen in the increasing confidence and upgraded guidance, reflected by a 30% increase in the quarterly dividend.

Valuation: Defence grabs the headlines but Sporting strength
With uncertainty surrounding defence and increasing competition, the rating of 8.5x CY13 EPS is at a discount to peers. However, with an improved outlook and greater optionality from the balance sheet, we believe potential shareholder value remains.

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