Guns and rockets conglomerate Alliant Techsystems (UNKNOWN:ATK.DL) spent much of last year buying companies and putting together the building blocks for a marquee business servicing hunters, target shooters, and sporting goods enthusiasts. Then on Tuesday, it announced plans to unload the whole thing.
With $1.2 billion in annual sales as recently as the end of fiscal 2013, Alliant's sporting group business was once the smallest of the company's three main business divisions (which also include aerospace and defense). Alliant ratcheted up its emphasis on sporting goods last year, however, buying first Savage Arms owner Caliber Co. for $315 million and then Bushnell Group for $985 million.
By the time it was done, Alliant Techsystems had built sporting goods into its biggest revenue driver -- $2.2 billion in annual sales and with brands ranging from Federal Premium ammunition to Bushnell optics, and Savage Arms rifles to Champion shooting targets.
Now, by all accounts, Alliant is ready to set the sporting goods business free to sink or swim on its own. As described in twin press releases issued yesterday, Alliant CEO Mark DeYoung will remain with the sporting goods unit once it is spun off from the rest of the company. What's left, the remainder of Alliant consisting of the present company's defense and aerospace businesses, will then merge with spaceflight specialist Orbital Sciences (NYSE:OA) to form a new, combined company with $4.5 billion in annual sales and an $11 billion backlog of orders ready to be worked on.
Investors appear to like -- nay, love -- the plan, bidding up Alliant shares by nearly 7% in Tuesday trading, and bidding up shares of its soon-to-be merger partner Orbital Sciences by an even more incredible 16.5%. But who's really getting the better of this deal?
Describing its plans for the spin-off and merger, slated to take place before the year is out, Alliant spent most of its time talking about its future as part of Orbital. The company had less to say about what the future holds for the sporting goods business it will be divesting -- so here's a bit more insight about that.
Alliant noted that in calendar year 2013, its sporting goods business did $2.2 billion in revenues, and generated "adjusted" earnings before interest, taxes, depreciation, and amortization of $361 million. That works out to about a 16.4% adjusted EBITDA margin, indicating that the sporting goods segment that is to be spun off is currently the more profitable part of Alliant's business, which generated an overall EBITDA margin of 14.1% last year.
The company's actual net profit margin, on the other hand, was just under half that at 7%. A very rough estimate of net profitability at an independent sporting goods business, then, is that it might generate net profit margins of 8%, for $176 million or so in annual profit.
Potentially, an Alliant-less sporting goods business could be even more profitable than that, though. To consider a couple of similar examples, Olin Corp. (NYSE:OLN), a key Alliant competitor in ammunition for firearms, earns profit margins of only about 7% on its business (which includes a large chemicals segment). On the other hand, rival weapons makers Smith & Wesson (NASDAQ:AOBC) and Sturm, Ruger (NYSE:RGR), which both possess significant "accessories" businesses supplementing their core firearms brands, generate net profit margins of 14% and 16%, respectively. If sporting goods can earn profits more along those lines than what I've posited above, its profits could potentially be double the best-case scenario -- and sporting goods could potentially become a much fiercer competitor for the incumbent giants of publicly traded firearms companies in the U.S.
Foolish final thought
How likely is this rosy scenario to materialize? Increasingly likely, I would say. Sketching out the prospects for the half of Alliant that he has chosen to head after the spin-off, DeYoung noted, "Sporting continues to deliver excellent performance," featuring "fourth quarter... revenue and earnings growth, and margin expansion" (emphasis added).
Time will tell if DeYoung is making the right choice by leaving Alliant to remain with sporting goods. Fortunately for investors, it may not take very much time to figure this out, though. Alliant is scheduled to report Q4 earnings just two weeks from now, on May 15. With any luck, those earnings will give us even more clarity into which of Alliant's two businesses will be the right one to own.