ATK Inks Ammo Deal with U.S. Army

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Alliant Techsystems Inc. (ATK) has entered into an Indefinite Delivery/Indefinite Quantity (“IDIQ”) contract worth $266 million with the U.S. Army. Per the contract, the company will supply small caliber ammunition, including 5.56mm, 7.62mm and .50-caliber cartridges.

This ammunition will be manufactured in Alliant’s Lake City Army Ammunition Plant in Independence, Missouri. The U.S. Army and the company have jointly invested $276 million in the modernization of the facility. As a result, the company has already been able to scale up the new 5.56mm cartridge production under the Enhanced Performance Round as known to the U.S. Defense.

Alliant plays a significant role to meet the U.S. Army’s demand for the small caliber ammunition. In the past twelve years, the company supplied 11 billion rounds of bullets to the armed forces. In May last year, the company received a similar IDIQ contract from the U.S. Army, with a deal value of $488 million.

Alliant is slated to release its fourth quarter and fiscal 2012 numbers on May 3, 2012. The Zacks Consensus Estimates for the fourth quarter and fiscal 2012 is currently $1.70 per share and $7.77 per share, respectively.

The company is well positioned with defense contracts. It is focused on improving and revamping the Aerospace Group, the Defense Group and the Sporting Group. We believe that these initiatives will ensure long-term top and bottom-line growth for the company and increase free cash flow. These will add value to shareholders through distribution of continuous cash dividends.

But, we are concerned about limited military ammunition orders due to U.S. defense budget cutbacks, continued demand for lower-priced and lower-margin ammunition products in the Security and Sporting Group, higher pension expenses, and lower sales volume related to loss at the Radford Army Ammunition Plant. We currently retain a Zacks #3 Rank on the stock, which translates into a short-term Hold rating.

Arlington, Virginia-based Alliant Techsystems Inc. is a premier aerospace and defense company supplying products to 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. Alliant Techsystems peers include Astronics Corporation (ATRO) and Hexcel Corporation (HXL).

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