Michael Ciarmoli
Michael Ciarmoli covers companies in the aerospace and defense sector as a director of the capital goods equity research team for SunTrust Robinson Humphrey, Atlanta, a division of SunTrust Banks.
Sometimes an accounting error creates a buying opportunity, which is the case with today’s Stock of the Week, a strong aerospace and defense company.
Orbital ATK Inc. (OA) saw its stock price plunge recently after it announced that accounting errors had obscured a loss of up to $450 million on a US Army ammunition contract. But that setback creates a buying opportunity for investors in this strong aerospace and defense company.
Formed in February 2015 through the merger of Orbital Sciences Corporation and parts of Alliant Techsystems, Orbital ATK makes rockets, military ammunition and satellites. No matter who wins the presidential election, the company is poised to benefit from strong defense spending.
Because of the accounting errors, Orbital ATK will restate its financial figures, which will result in a $250 million post-tax charge related to lower-than-expected cost savings on a fixed-price contract. But the adjustment will have no effect on cash flow or backlog, and the company said it does not suspect fraud was involved in the financial misstatements.
Orbital ATK is strong in precisely the areas where the defense budget is going to expand in coming years, such as next-generation ballistic missiles to provide a strategic deterrent other than nuclear warheads. Competition in satellites is a possible headwind but is not serious enough to hold back the firm’s strength in weaponry. Revenue of $4.5 billion in 2015 should grow to $4.55 billion this year and $4.8 billion in 2017. The dividend of $1.20/share/yr. recently yielded 1.5% and appears secure.
Earnings per share: 2017 est./$6.50…2016 est./$5.44…2015/$5.02.
Michael Ciarmoli is vice president and research analyst, aerospace and defense, at KeyBanc Capital Markets, a division of KeyBank, Cleveland, which manages $98.4 billion.
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