Will Orbital ATK (OA) Prove to Be an Appropriate Value Pick?

Value investing is easily one of the most popular ways to find great stocks in any market environment. After all, who wouldn’t want to find stocks that are either flying under the radar and are compelling buys, or offer up tantalizing discounts when compared to fair value?

One way to find these companies is by looking at several key metrics and financial ratios, many of which are crucial in the value stock selection process. Let’s put Orbital ATK, Inc. OA stock into this equation and find out if it is a good choice for value-oriented investors right now, or if investors subscribing to this methodology should look elsewhere for top picks:

PE Ratio

A key metric that value investors always look at is the Price to Earnings Ratio, or PE for short. This shows us how much investors are willing to pay for each dollar of earnings in a given stock, and is easily one of the most popular financial ratios in the world. The best use of the PE ratio is to compare the stock’s current PE ratio with: a) where this ratio has been in the past; b) how it compares to the average for the industry/sector; and c) how it compares to the market as a whole.

On this front, Orbital ATK has a trailing twelve months PE ratio of 15.98. This level compares pretty favorably with the market at large, as the PE ratio for the S&P 500 comes in at about 20.11.

If we focus on the long-term trend of the stock the current level puts Orbital ATK’s current PE among its highs. This suggests that the stock is overvalued compared to its own historical levels and thus it might be prudent to wait for a more suitable entry point to emerge. Also, we can see that the PE multiple has been on an upward trend since the beginning of 2015.

Delving deeper into the PE’s inputs we observed that the reason for this increase were the consistently falling earnings since the beginning of 2015. While the price fell once and remained somewhat constant at that level, the earnings of the company continued to fall. This had an inflating effect on the stock’s PE.

One of the primary reasons behind the fall in earnings was a contract for the production of U.S. military small-caliber ammunition worth $2.3 billion, which was awarded in 2012. The contract had been incurring losses since 2014. An error in accounting was located after intense review and was therefore ruled as a loss contract in 2016. Recognition of this contract as a loss contract led to a restatement of accounts, primarily for fiscal 2015. However, the company has maintained that this loss was a one-time event and that other contracts are doing well. Even so, it made investors jittery.

Nevertheless, we can also observe that earnings have begun to stabilize a bit in 2016. It would be highly favorable for the company if this trend continues.

Further, the stock’s PE also compares favorably with the Zacks classified Aerospace - Defense Equipment industry’s trailing twelve months PE ratio, which stands at 19.16. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers. In fact, the stock has historically always been undervalued than its peers over the entirety of the observed period.

We should also point out that Orbital ATK has a forward PE ratio (price relative to this year’s earnings) of just 14.78 – which is lower than the current figure. So it is fair to say that a slightly more value-oriented path may be ahead for Orbital ATK stock in the near term too.

PS Ratio

Another key metric to note is the Price/Sales ratio. This approach compares a given stock’s price to its total sales, where a lower reading is generally considered better. Some people like this metric more than other value-focused ones because it looks at sales, something that is far harder to manipulate with accounting tricks than earnings.

Right now, Orbital ATK has a P/S ratio of about 1.17. This is lower than the Zacks categorized Aerospace - Defense Equipment industry average, which comes in at 1.55 right now.

Notably, OA is actually in the higher zone of its trading range in the time period per the P/S metric, which suggests that the company’s stock price has already appreciated to some degree, relative to its sales.

Broad Value Outlook

In aggregate, Orbital ATK currently has a Zacks Value Style Score of ‘B’, putting it into the top 40% of all stocks we cover from this look. This makes Orbital ATK a solid choice for value investors, and some of its other key metrics make this pretty clear too.

For example, the PEG ratio for Orbital ATK is just 1.48, a level that is lower than the industry average of 1.84. The PEG ratio is a modified PE ratio that takes into account the stock’s earnings growth rate. Clearly, OA is a solid choice on the value front from multiple angles.

What About the Stock Overall?

Though Orbital ATK might be a good choice for value investors, there are plenty of other factors to consider before investing in this name. In particular, it is worth noting that the company has a Growth grade of ‘D’ and a Momentum score of ‘B’. This gives OA a Zacks VGM score—or its overarching fundamental grade—of ‘B’. (You can read more about the Zacks Style Scores here >>)

Meanwhile, the company’s recent earnings estimates have been mixed at best. While the full year 2016 estimates have moved down by 0.2%, full year 2017 estimates have inched higher by 0.2%. You can see the consensus estimate trend and recent price action for the stock in the chart below:

Orbital ATK, Inc. Price and Consensus

Orbital ATK, Inc. Price and Consensus | Orbital ATK, Inc. Quote

This somewhat mixed trend is why the stock has just a Zacks Rank #3 (Hold) and why we are looking for in-line performance from the company in the near term.

Bottom Line

Orbital ATK is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. However, with a sluggish industry rank (Bottom 33% out of more than 250 industries) and a Zacks Rank #3, it is hard to get too excited about this company overall.

Moreover, the defense space is characterized by intensifying competition, dependence on government budgets and volatile commodity prices, which can deter growth. Notably, the industry has widely underperformed the broader market over the last three years, as you can see below:

Despite such negative broader factors, the fact remains that Orbital ATK’s wide array of products and merger synergies are expected to boost performance. Also, its current backlog provides excellent visibility on near-term top-line expansion. This indicates that the company remains a strong value proposition.

So, value investors might want to wait for analyst sentiment to turn around in this name and the price to correct downwards a bit first, but once that happens, this stock could be a compelling pick.

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