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Alliant Upgraded to Outperform

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We upgrade our recommendation on Alliant Techsystems Inc. to Outperform from Neutral given its diverse defense product line and solution capabilities. In addition, the company’s strong financial position allows it to grow, both organically and inorganically. The company is also in the process of realigning its business segments, which enables it to improve operational efficiency and future financial performance.

We view Alliant as a well diversified company. It is one of the important aerospace and defense products and solutions contractors of the U.S. Department of Defense (“DoD”). The company supplies various calibers of ammunition including small-arms ammunition, composite components for commercial and military aircrafts, and precision-strike weapon systems to the U.S. armed forces and police.

In addition, Alliant has a strong relationship with the National Aeronautics and Space Administration (“NASA”) and is working with NASA to develop the Ares 1 Solid Rocket to replace the Space Shuttle. We believe these expanded revenue streams enable the company to improve its future top and bottom line numbers.

The government contracts in fiscal 2012 contributed 27% of Alliant’s total sales. The company is largely levered to federal government spending and its main customers include DoD and NASA. In the present scenario, there is a possibility of defense budget cutbacks. Curtailment of defense budgets might lead to cancellation and reduction of large government contracts, which will subsequently impact the company’s operating results.

In addition, Alliant faces competition from a number of players in each of its business areas. The company’s ability to compete successfully depends on a number of factors including effectiveness and innovativeness of research and development programs, better program performance at a lower cost, superior facilities and equipments, skilled personnel, past performance and other demonstrated capabilities.

On the positive side, Alliant has grown substantively as a result of both internal expansion and a series of acquisitions. The company completed several major acquisitions in the past few years. The acquisition of Eagle Industries and Blackhawk significantly expanded the company’s sales in the tactical accessories market thus enabling it to leverage its existing distribution network to gain market share and realize synergies.

During its fourth quarter of fiscal 2012 earnings release, Alliant announced its fiscal 2013 earnings guidance in the range of $6.25–$6.55 per share, an increase of 25 cents from the earlier expectation. The company also announced its fiscal 2013 total revenue expectation in the band of $4.0–$4.1 billion. The Zacks Consensus Estimate for first quarter and fiscal 2013 earnings are currently pegged at $1.40 per share and $6.47 per share, respectively.

Alliant Techsystems Inc. currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. The company competes with Raytheon Company (RTN - Free Report) .

Arlington, Virginia-based Alliant Techsystems Inc. is a premier aerospace and defense company, supplying products to the U.S. government agencies, and its prime contractors and sub-contractors. The company also supplies ammunition and related accessories to law enforcement agencies and commercial customers.

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