How Much Is the New Orbital ATK Worth?

It's official: Orbital ATK (NYSE: OA) is its own company now.

Photo: Orbital ATK.

The company, formed by the merger of twin space-tech titans, marries Orbital Sciences' expertise in building rockets and satellites with Alliant Techsystems' specialization in rocket boosters, and promises to create a worthy rival to aerospace giants such as Boeing, Lockheed Martin, and SpaceX. Unfortunately, some financial data providers are still figuring out the numbers on the merged company, days after the merger closed. That's not uncommon in the immediate wake of an IPO, merger, or spinoff -- but it can be frustrating for an investor wanting to know whether to buy today. But never fear, dear investor. We've got you covered.

With a little help from S&P Capital IQ, we've collected some data and crunched some numbers to develop an accurate idea of what the new Orbital ATK might be worth. Here are the key stats as of Dec. 28, 2014, which appears to be third-quarter 2014 on Orbital ATK's new fiscal calendar:

Orbital ATK

As for what this means for valuation, Orbital ATK now sells for:

• 0.7 times annual sales,
• 11.3 times earnings,
• or 22.5 times free cash flow...

...depending on your favorite flavor of stock valuation. Thus, both the price-to-sales and P/E ratios on the new company look pretty attractive -- but the price-to-free cash flow ratio a bit less so. Meanwhile, for investors partial to enterprise value-to-free cash flow (as I am), the stock's heavy debt load and weak cash production result in an EV/FCF ratio of roughly 31 -- which seems pretty high.

Furthermore, when you consider S&P Capital IQ clocks the company at just 4% annualized earnings growth over the next five years, paying 31 times annual free cash flow seems an exercise in optimism.

Should you be optimistic?
Will that optimism be justified? Looking back over the past five years of Orbital's results, it seems the average rate of cash profit production was about $330 million -- not too far off from where Orbital ATK stands today. Capital spending, meanwhile, has averaged closer to $128 million annually -- a bit below today's spending level.

A generous interpretation of the numbers, therefore, suggests the newly merged Orbital ATK is capable of generating $200 million in annual free cash flow over time. Taking the stock's 2.1% dividend yield into consideration, I'd say shares are therefore appropriately valued if Orbital ATK can grow profit by about 16% annually. S&P doesn't seem to think Orbital can do that. Yahoo! Finance (where, keep in mind, the data is still being updated) is more optimistic, showing Orbital pegged for 13.5% long-term earnings growth by the analysts that it surveys.

Long story short? Whether the stock in the new Orbital ATK is undervalued, overvalued, or fairly valued depends on which numbers you look at, and how you look at them. But the way I look at the numbers, Orbital ATK stock is not sufficiently cheap to be worth buying today.