Introducing Orbital ATK -- the Next Big Thing in Space Flight

Two marquee space companies plan to merge later this year. Should you invest in the result?

Apr 30, 2014 at 6:04PM

Industrial conglomerate Alliant Techsystems (NYSE:ATK) has historically been known best as a maker of ammunition for firearms, and rockets for rocket ships. Last year, however, the company put a lot of time and effort into building up what was, at the time, its smallest business unit: firearms and accessories for hunting and shooting sports. Then, all of the sudden, on Tuesday, it announced plans to get rid of the whole "shooting match."

In a two-phase deal valued in the billions of dollars, Alliant announced plans to first spin off its $2.2 billion in annual revenue generating sporting goods business as a separate entity, then take what is left and roll it into a merger of equals with rockets and satellites manufacturer Orbital Sciences (NYSE:OA).

As described in twin press releases issued yesterday, Alliant CEO Mark DeYoung will remain with the sporting goods unit. What remains, the present firm's defense and aerospace businesses, will be helmed by merger partner Orbital Sciences' (NYSE:OA) CEO, David W. Thompson. Here's what is known about the company that will result from this merger.

This Orbital Sciences Taurus XL rocket is ready for lift off -- but the stock's price has entered the stratosphere already. Source: Wikimedia Commons.

Introducing Orbital ATK
Sometime before the end of this year, Alliant and Orbital will merge their space and defense businesses into a new entity, to be known as Orbital ATK. Current Alliant shareholders will control 53.8% of the new business, and Orbital shareholders, 46.2%. The new company will specialize in building "space launch vehicles and propulsion systems, tactical missiles and defense electronics, satellites and space systems, armament systems and ammunition, and commercial and military aircraft structures and related components." It will also inherit Orbital's ongoing NASA contract to keep the International Space Station resupplied with periodic milk-run missions.

Numbers-wise, adding Orbital's $1.35 billion in trailing-12-month revenues to the $2.4 billion that Alliant (without sporting goods) will bring along, will result in a firm doing at least $3.7 billion in business. In fact, according to the merging companies, total 2013 revenues from the two businesses is expected to be even more than that -- $4.5 billion, and with more to come from a combined $11 billion backlog of space and defense orders ready to be fulfilled.

Management is anticipating that the combined company will have a market cap of roughly $5 billion (this figure appears to include the value of the companies' combined debt, which management says works out to about $1.4 billion net of cash). Indeed, given the sharp price spikes that both companies experienced yesterday in response to the news (Alliant shares were up 7%; Orbital, 16.5%), the ultimate valuation of the combined company could be even higher -- perhaps as high as $5.9 billion including debt.

Factoring debt, cash, and market capitalization all in to the picture, this suggests that a combined Orbital ATK may sell for an enterprise value of as much as 1.18 times sales post-merger, which would be a bit pricey for an aerospace and defense firm. Rivals Boeing (NYSE:BA) and Lockheed Martin (NYSE:LMT), for example, which together form the United Launch Alliance, or ULA, against which Orbital Sciences currently competes, command P/S ratios of only 1.06 times sales, and 1.14 times sales, respectively -- and with significantly smaller debt loads to boot.

Foolish takeaway
Is a combined Orbital ATK worth a small valuation premium to the components of larger ULA? Foolish minds can differ. On the one hand, Boeing and Lockheed's alliance boasts a scale of operations that Orbital ATK will not soon match. As the dominant entity in space launch, you'd ordinarily expect ULA's component companies to sell for a higher valuation than Orbital ATK commands, rather than a cheaper one.

On the other hand, the $5 billion in annual business that Orbital ATK says it will do in a year makes the company much smaller, and potentially nimbler in competing against the giants that are Lockheed and Boeing -- with combined revenues in excess of $133 billion. If you subscribe to the thesis that the "law of large numbers" will limit Boeing's and Lockheed's ability to grow quickly, but put no such restraints on a newer and stronger upstart like Orbital ATK... then the new company just might be worth what investors say they're now willing to pay for it.

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Rich Smith has no position in any stocks mentioned. The Motley Fool recommends Orbital Sciences. The Motley Fool owns shares of Lockheed Martin. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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