Alliant Techsystems Making Changes For New World Of Defense Contracting

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Alliant Techsystems (ATK) has seen sales increase over the last decade due to the U.S. military demand for ammunition, explosives, pyrotechnics and rocket motors for use in Iraq and Afghanistan as well as training purposes. The stock though has not moved much in recent years trading around the $60 mark for most of the last year although it hit a peak of close to $76 in May of last year.

ATK reported its most recent quarterly results after the market closed on February 2nd. Alliant Techsystems, while it does have a growing customer base, still is heavily reliant on defense spending. It also has some contracts with the Federal government that make up a great deal of its revenue. The company has suffered the loss of one of these contracts - the one to run the Radford explosives plant - and faces stiff competition to keep the ammunition production one at Lake City, Missouri. That contract accounts for 15% of the company's revenue annually.

For ATK this is their 3rd quarter of Fiscal Year 2012. Earnings were down slightly quarter-to-quarter to about $1.1 billion with total revenue for the year, and the company projects about $4.6 billion of sales for the year. This is the low end of previous guidance and should be expected with some of the charges and contract moves the company experienced. For the year the prediction is $7.65 to $7.75 a share. Formal guidance on FY13 will be made with next quarter's report.

The company is facing issues not only from the defense budget but also from NASA's space exploration program changes as its Aerospace Systems group saw a 6% drop. This is mainly due to the end of the Space Shuttle program. Armament Systems saw a like drop and this will be more next quarter due to the loss of the Radford contract.

There are some bright spots for the company as its ammunition sales to the civilian and security market have increased 17%. Margins were lower on these sales, though, due to price and margins being lower on the commercial market.

The company is also manufacturing some innovative and important products for the U.S. military including the AGM-88E Advanced Anti-Radiation Guided Missile (AARGM) which is the latest anti-radar missile in use with the U.S. Navy and other military forces. ATK also makes the XM-25 Punisher squad weapon, which is a spin off of the failed XM-8 rifle program for the U.S. Army. The XM2-25 has been tested in Afghanistan and the results have been encouraging enough for more to be bought leading to a $70 million contract for Alliant Techsystems.

What does this all mean for the corporation and its stock? There will be some struggles as it adjusts to the loss of the Radford contract, the upcoming contest for the Lake City contract and the expected decline in the defense budget. The end of fighting in Afghanistan now planned for 2013 will reduce the spending on ammunition and perhaps investment in new small arms. In the short term revenue may decline and the stock price suffer.

The company is adjusting. The corporation recently relocated its headquarters from Minnesota to Northern Virginia to aid it in interfacing with its customers and Congress. It named a new CFO, Neal Cohen, to replace an interim one. Mr. Cohen has experience with the airline industry and is a key hire to help develop the company's business strategy for the future. It also plans to reorganize in 2013 into three groups to address their changing sales pattern. The new groups will be Aerospace, Defense and Sporting. Aerospace will include the company's growing business making aircraft structures, Defense weapons and ammunition and Sporting will handle the growing civil market business.

ATK is being proactive in dealing with the near term of defense spending and their markets. The changes they are making in 2013 will help them weather the expected downturn. All of this makes the long term look fairly good and certainly a reason to remain positive on the company and its stock.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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