Military contractor Alliant Techsystems, now going by the moniker ATK (UNKNOWN:ATK.DL), is one of the nation's largest manufacturers of bullets for the Army. Lately, it's been turning itself into one of the bigger suppliers to the civilian gun industry as well.
Four months ago, ATK announced that it was acquiring Savage Arms owner Caliber Co., a manufacturer of centerfire and rimfire rifles and shotguns, for $315 million. Today, ATK is going back to the well to pick up Bushnell Group Holdings, expanding its portfolio of outdoor shooting products with sports optics (such as gunsights, scopes, and bionoculars, laser rangefinders, and performance eyewear (such as protective goggles).
As the company tells it, by buying Bushnell it will be able to offer civilian gun enthusiasts "a comprehensive product offering in commercial and security ammunition, sporting arms and accessories." But at what price?
When ATK closes on Bushnell, as is expected to take place in Q3 or Q4 of the company's fiscal 2014, it will be paying $985 million cash for the acquisition. ATK describes this sum as equal to 10 times Bushnell's earnings before interest, taxes, depreciation, and amortization (EBITDA); it is also approximately 1.6 times Bushnell's $600 million in sales projected for 2013.
By way of comparison, for the same P/S ratio that ATK is paying to acquire Bushnell (and a smaller overall price), it could easily have bought Smith & Wesson (NASDAQ:AOBC), lock, stock, and barrel. For a slightly higher P/S ratio, and almost the same price Bushnell is charging, ATK could have acquired Sturm, Ruger (NYSE:RGR) -- an even more profitable operation than S&W!
Meanwhile, ATK's own shares sell for less than 5.6 times EBITDA (nearly half the valuation it's paying for Bushnell), and ATK's P/S ratio is only 0.7 -- less than half the valuation it's ascribing to Bushnell. These figures alone tell us that this military contractor is paying a pretty penny to expand its civilian business. But wait -- it gets worse.
According to ATK, buying Bushnell will dilute (read "hurt") the company's earnings for fiscal 2014 by an unspecified amount. ATK does not expect to receive a benefit from the purchase in the form of greater earnings until fiscal 2015. Appreciable profits growth -- approximately $1 per share, or $32 million total -- may not appear until fiscal 2016.
So put another way, military contractor ATK is spending 31 times earnings for some civilian earnings -- earnings that it does not even expect to earn until two years from now -- and it's paying this valuation in today's dollars.
What do I think of this acquisition, you ask? Let me put it this way: Four months ago, I thought ATK was overpaying for Savage Arms. Today I'm pretty sure it's overpaying even more for Bushnell.