Seeking Alpha: Orbital Sciences And Alliant Techsystems Look Like A True Win-Win

No company has ever announced a merger with "this is a value-destroying transaction that we're launching because we want a bigger fiefdom and don't really know how to build value." That said, while investors are wise to be very skeptical about the synergies companies promise with merger announcements, Tuesday's announced merger between Orbital Sciences (ORB) and Alliant Techsystems (ATK) looks like a really good opportunity to build a stronger business.

As I had valued Orbital at around $31 per share in February, and I calculate a value of about $31 in Alliant's offer for the company, I can't say that this is an unfair deal for either side. What's more, for those shareholders willing to hold on and see how the synergies play out, this could be a case where 1+1 equals something meaningfully more than "2".

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Orbital Sciences And Alliant Techsystems Look Like A True Win-Win

Seeking Alpha: Huntington Ingalls Needs A New Driver

Since it spun out from Northrop Grumman (NOC), Huntington Ingalls (HII) has done pretty well. Shares of this pure-play Navy shipbuilder have risen about 150% in its time as a publicly-traded company, handily beating other defense and shipbuilding companies like General Dynamics (GD) and Lockheed Martin (LMT).

At least some of Huntington Ingalls' performance can be tied to its progress in improving margins, moving through an order book that included some very low-margin business and putting its 9% margin targets very much into play. The question investors should probably ask now is how the company continues to improve its results. Projecting defense spending down the line is tricky, but major projects like carriers, submarines, and destroyers could fare better. I like the prospects for Huntington Ingalls continuing to improve its profitability and free cash flow generation, but the shares seem to already reflect continuing improvement here.

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Huntington Ingalls Needs A New Driver

Seeking Alpha: Orbital Sciences Executing Better, But Business Remains Volatile

I liked Orbital Sciences (ORB) back in September, but even I'm surprised at the better than 50% jump in the shares. Successfully completing the first operational Cygnus cargo mission to the International Space Station definitely helped, but so too did solid guidance on revenue and free cash flow for 2013. As the Cygnus program matures, recognized margins should move up and Orbital should unlock significant free cash flow. Risks remain, though, in the company's ability to keep the satellite business moving forward and resolving potential supply issues for the Antares rocket.

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Orbital Sciences Executing Better, But Business Remains Volatile

Seeking Alpha: Can Orbital Sciences Be More Than Just A Good Idea?

If you want to be uncharitable, you could say that Orbital Sciences (ORB) is a company with a great future in its past. Going beyond the "gee whiz" factor of a company that builds launch vehicles and space systems, this is a company that has shown generally solid progress in revenue growth over the years but has struggled to show consistent free cash flow production or stock price appreciation.

Orbital could be looking at a period where results turn up, though. The commercial satellite business should benefit from a cyclical upswing in orders, and the company's participation in NASA programs tied to the International Space Station (ISS) should begin to pay off in the coming five years. Underlying that is a relatively stable business built around missile defense and military and research satellites. There will always be risks tied to government budgeting priorities and spectacular operating failures, but I can sympathize with investors taking a "it's different this time" approach to Orbital Sciences.

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Can Orbital Sciences Be More Than Just A Good Idea?

Investopedia: Absent Macro Shocks, Cash And Expenses Will Drive Boeing

A year ago I thought that Boeing (NYSE:BA) looked undervalued and ready to outperform as investors bought in to the company's considerable commercial ramp. Since then, the stock is up about 20% and although worries about batteries on the 787 did create some headaches, the company remains in good shape with respect to its market share and backlog. I still believe that Boeing should sport a triple-digit stock price and though I won't ignore the risks of a major macroeconomic slowdown, I think the biggest concerns for Boeing are now reaching cost/profit targets and how to use the considerable sums of cash it will generate.

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Investopedia: Sequestration - What Will It Do, And What Should You Do?

With the deadline having come and gone with no real action from Congress, sequestration is now the reality of the U.S. economy. Originally designed as an unthinkable, unacceptable, avoid-at-all-cost-because-it's-too-horrible-to-contemplate “trick,” in order to force Congress to negotiate and achieve long-term plans for a better balance between spending and revenue generation (taxes), Congress instead decided to think the unthinkable and let it happen.

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Investopedia: Will This Aerospace Cycle Finally Let Hexcel Take Off?

It may sound contradictory, but Wall Street is often both predictive and reactive. To that end, the stock of carbon fiber specialist Hexcel (NYSE:HXL) has done pretty well since 2009 on the basis of investor expectations for more composite material content in commercial aerospace. At the same time, though, it's well worth remembering that Hexcel has struggled to deliver consistent, impressive margins and returns on capital. If Hexcel can't find a way to establish better peak earnings and cash flow potential, it may be difficult for these shares to outperform.

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Investopedia: Budget Worries Could Crimp Cubic In The Short Term

I think many investors spend too little time thinking about their investing horizons when contemplating new positions. Although "buy and hold until it works out" is probably the default strategy for many investors, it can lead to some tense moments in the short-term. That brings me to Cubic (NYSE:CUB), a company which I think has a very interesting long-term outlook, but may well underperform for the next year or two.

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Financial Edge: The Reality Of Investing In Space Exploration

Space exploration has long been one of those endeavors that many try to argue has to be the domain of national governments. Not only does space exploration carry a huge price tag and uncertain economic returns that are anathema to companies, but many pundits and observers have worried that their involvement will somehow sully the virtues of pure science and/or lead to unrestrained land-grabs that will be hard to adjudicate in on-the-ground courtrooms.

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Seeking Alpha: Microsemi Needs To Start Delivering On Its Potential

There's a quote out there, apocryphally quoted to former NFL player Randy White, that “potential is a fancy French word that means you haven't done anything yet”. Although that is arguably a harsh introduction to semiconductor company Microsemi (Nasdaq: MSCC), there is an element of truth to it – Microsemi could indeed be an attractive semiconductor stock to hold at these prices, but the company needs to begin delivering on the growth and margin potential that bulls have long seen in the name.

Come Hell Or High Water
There were multiples concerns that set these shares back in 2011, but it is worth noting that Microsemi's performance was not that bad in the context of a generally poor year for semiconductor stocks.

For starters, the near-constant wrangling over the federal budget and the concern over the government's debt and deficit situation has led investors to assume significant cutbacks in defense spending. With roughly one-third of Microsemi's business coming from selling to defense contractors like Lockheed (NYSE: LMT), Raytheon (NYSE: RTN), and L-3 (NYSE: LLL), that's no trivial concern. Fortunately for the company, the recent defense budget was not as bad as initially feared and the company stands to benefit from smart warefare retrofit projects (like GPS-equipped mortars).

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Microsemi Needs To Start Delivering On Its Potential

Investopedia: Orbital Sciences - Profits In The Final Frontier

Space exploration is a tricky calculation for politicians. Although the long-term benefits are real, it can be difficult to justify the seemingly enormous price tags in the short term, particularly when there is no shortage of people willing to howl that those billions could be spent closer to home. This push-pull is in some ways a design feature for Orbital Sciences (NYSE:ORB). As one of the only companies out there devoted to space-based systems, Orbital would seem to offer a golden ticket to the U.S. government - the opportunity to continue to reap the benefits of space activity while also cutting costs and encouraging the private sector to take a larger role.

From the Mundane to the Magnificent  
Orbital Sciences has been at this quite a while, so long in fact that quite a few institutional investors have gotten bored with the name. That overlooks the fact that the company has actually accomplished quite a lot. This company not only sells missile defense target vehicles to the Department of Defense, but is also a viable player alongside The Boeing (NYSE:BA), Raytheon (NYSE:RTN), Lockheed Martin (NYSE:LMT) and Alliant Techsystems (NYSE:ATK) in areas like launch vehicles, satellites and space systems.

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Investopedia: Bulls Onboard Boeing

The stock of American aircraft giant The Boeing (NYSE: BA) seems to always be in "hurry up and wait" mode. Investors and analysts always seem to be more interested in the cycle to come than in the business today. Of course investing is a forward-looking endeavor, but it looks like the long-awaited good times at Boeing are in sight at last.


A Respectable Third Quarter
The good times are close at hand for Boeing, but not exactly here yet. Revenue rose just 4% in the third quarter, as relatively better sales (up 9%) in commercial aerospace offset flat results in the defense business. Within defense, Boeing balanced increased military aircraft revenue with declines in space and service and support revenue.

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Investopedia: Will United Technologies Land Goodrich?

The economy may be slowing and Europe may still be smoldering, but none of that precludes good ol' fashioned buyout speculation. The latest big-deal rumors swirl through the aerospace industry, where United Technologies (NYSE:UTX) is widely rumored to be trying to strike a deal to acquire aircraft parts and components manufacturer Goodrich (NYSE:GR).


The Deal That May Be
If rumors are true, United Technologies has been busy lining up many billions in financing to launch a bid (rumors range from $10 billion to $20 billion). As it pertains to Goodrich, the target price for a deal seems to be in the range of $110 to $125 - prices that would be from 18 to 35% higher than Friday's close (a close that was bolstered by the deal rumors hitting the market on Friday).

Taking the midpoint of that range, United Technologies would be paying about 12 times trailing EBITDA for Goodrich. Though there have not been major aerospace deals in a while, that price would not be out of line for a deal like this; it overvalues Goodrich on a standalone basis, but United Technologies should be able to pull multiple operating synergies out of the deal, as well as expand into new market opportunities.


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http://stocks.investopedia.com/stock-analysis/2011/Will-United-Technologies-Land-Goodrich-UTX-GR-BA-TXT-COL-ERJ-HON0919.aspx

Investopedia: Navistar Gets More Than The Benefit Of The Doubt

Navistar (NYSE:NAV) has had some real problems with its still-new EGR engine platform and the company's financial performance has likewise lagged many truck and engine peers like PACCAR (Nasdaq:PCAR), Volvo (Nasdaq:VOLVY. PK), Cummins (NYSE:CMI) and MAN. Oddly enough, that does not seem to really trouble investors. While Navistar shares have indeed been quite weak this year, it hasn't been any worse than Paccar, Volvo and MAN. The decline in Navistar share value has created a potential for significant gains if management can drive better performance - but oh what an "if" that seems to be.

Little To Get Hearts Racing In The Third Quarter  
It would seem like the best thing about Navistar's third quarter is that it basically met top line estimates. Revenue growth of 10% just does not seem that exciting; revenue in the engine and parts business looked good (up 20% and 23%, respectively), but truck revenue was up just 6%. Now it's fair to note that these are difficult comps because the defense business muddies the waters, but it just doesn't seem that Navistar has the same momentum in commercial trucks as its rivals. Couple that with management decisions a while ago to end relationships with Cummins and Ford (NYSE:F), and there is certainly something here for management to answer for to shareholders.


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http://stocks.investopedia.com/stock-analysis/2011/Navistar-Gets-More-Than-The-Benefit-Of-The-Doubt-NAV-PCAR-CMI-F-CAT-OSK-LMT0908.aspx

Investopedia: Are Buybacks A Bad Sign?

In the last decade or so, a common theme has emerged from U.S. boardrooms - when the going gets tough, companies start buying their stock. There are plenty of valid reasons for companies to repurchase their own stock, particularly when markets sell off and valuations drop. On the other hand, buybacks are not a terribly productive use of cash, and investors may be right to worry whether a spate of repurchase announcements in the face of a worsening economic environment is going to make things worse in the long run.

 

Who's Doing The Buying?  

The past few weeks have seen several large share repurchase announcements. Lockheed Martin (NYSE:LMT) and Lowe's (NYSE:LOW) take the cake with announcements of $1 billion and $5 billion plans, respectively. Maxim Integrated (Nasdaq:MXIM) is in for $750 million, Celgene (Nasdaq:CELG) added $2 billion to its plans, Marsh & McLennan (NYSE:MMC) is looking to buy back $1 billion, and Covidien (NYSE:COV) has a $2 billion plan in place.

 

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http://stocks.investopedia.com/stock-analysis/2011/Are-Buybacks-A-Bad-Sign-LMT-LOW-CELG-COV-AAPL-MXIM-MMC0824.aspx

Invesotpedia: Can CACI Get A Bigger Piece Of A Smaller Pie?

Weak federal government spending has been a problem for a lot of companies recently, including Cisco (Nasdaq:CSCO) and NetApp (Nasdaq:NTAP). With major worries about the unsustainability of recent budget deficits and political pressure to cut spending, it wouldn't seem like a good time to invest in companies that largely rely on federal business for their revenue. Still, with IT products and services that help government agencies modernize and cut costs, CACI International (NYSE:CACI) may be able to capture a bigger piece of smaller budgets. (To help further identify company success, read 3 Secrets Of Successful Companies.)

A Stronger Fourth Quarter Than Expected  
CACI managed to log better than 13% growth in the fiscal fourth quarter, slightly beating the average analyst guess. Organic growth was strong as well, at better than 11%. As usual, business from the Department of Defense was the driver this quarter - up more than 17% and making up 81% of sales. Revenue from federal civilian agencies, the company's second largest category, was down more than 2%.

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Investopedia: SRA Today, CACI Tomorrow?

Acquisition announcements on Fridays are a bit rare, but that was about the only really surprising part of the announcement that IT services provider SRA International (NYSE:SRX) was taking a bid to sell itself. What may be more interesting for investors, though, is the speculation as to whether SRA will get a competing bid and/or whether other leading IT service companies may see a revaluation of their shares.

SRA - A Solid Bid at Last
There have been rumors for a little while that SRA was attracting buyout interest. There was a rumor back in January that Britain's Serco had offered $2 billion, and the company has basically been in play ever since. Those rumors came to some fruition with the announcement Friday that the company had accepted a bid from Providence Equity Partners for $31.25 a share in cash, or a total deal value of $1.9 billion.

At $31.25 a share, Providence is giving shareholders a 10% premium to Thursday's closing price and more than a 50% premium to the price before the deal speculation really got going. Like the eBay (Nasdaq:EBAY) deal for GSI Commerce (Nasdaq:GSIC), this offer is including a 30-day go-shop period; likely in the hopes of de-fanging the ambulance-chasing class action suits that seem to be popping up these days whenever a deal is announced. (For more, see Is eBay Looking At GSI Commerce As Another PayPal?)

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An Intelligent Deal For Raytheon

The unpredictable and highly political nature of defense and intelligence spending make it difficult for small, publicly traded defense companies to really thrive. It is not all that surprising, then, that there has been a wave of M&A in the space - not only due to the increasing significance of electronic warfare and the need for bigger companies to add technology, but also the increasing uncertainty of spending in the face of higher deficits and debts.

With all that in mind, then, it is not surprising to see Monday's announcement that Raytheon (NYSE:RTN) reached a deal to acquire Applied Signal (Nasdaq:APSG). (For background reading, check out the Mergers & Acquisitions Tutorial.)

The Scoop on the Deal 
What is a surprise is that Applied Signal's management essentially put itself on the block back in October of this year. This is surprising because the company's management had not been very warm to the idea of a sale for many years. With that change in attitude though, things moved quickly.

Raytheon, one of the largest defense companies in the world, announced that it would acquire Applied Signal for $490 million in an all-cash deal that values Applied Signal at $38 per share. That is not only a 9% premium to the stock's closing price on Friday, but also a 90% premium to where the stock traded before management publicly discussed the possibility of a sale.

All in all, this is an eminently fair deal for Applied Signal shareholders. Relative to deals like Boeing (NYSE:BA), which bought Argon ST; Northrop Grumman (NYSE:NOC), which bought Essex; and FLIR (Nasdaq:FLR), which acquired iCX Tech; if APSG goes out at more than 15 times its trailing EBITDA, it's a fair price.

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Can Boeing Afford More Delays?

Patience in a funny thing. Everybody wants a job to be done right, but they also want it done on a timescale that at least approximates the original estimates. Customers appreciate that Boeing (NYSE:BA) is attempting to do something quite extraordinary with the 787 Dreamliner project, but if the company cannot ever deliver the plane, who cares how amazing it is? 

More to the point - is Boeing running the risk of giving unintentional aid and comfort to emerging rivals? Should investors worry that Boeing's scale and technical expertise may all go for naught because the company was too ambitious and customers ultimately settle for lesser planes that rivals can actually deliver?  

More Problems ... Again
Boeing has had no shortage of problems with this new 787 plane. Problems with the Rolls Royce engine (one of the two available; the other being offered by General Electric (NYSE:GE)) got a lot of attention, and now Boeing has suspended test flights after an onboard electrical fire. While the company has not formerly altered the expected initiation of deliveries in the middle of the first quarter of 2011, the Dreamliner is already three years behind schedule and more delays seem more likely than not.

Of course, these delays need to be kept in perspective. There has never been a plane quite like the Dreamliner, and the scale of the engineering challenges are enormous. On top of that, these planes may spend well more than 30 years in service and it is clearly important to get everything right ahead of time.  

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Allegheny Becomes Broader Still

Give credit where it is due - Allegheny Technologies (NYSE:ATI) is not messing around when it comes to its plans to diversify away from stainless steel products and become a more diversified player in advanced alloys and technologically sophisticated components. The latest move is the acquisition of Ladish (Nasdaq:LDSH), a small company that has focused on forged and cast-metal components for the aerospace and defense industry.

The Deal
Allegheny is paying a total consideration of $48 per share to Ladish, consisting of $24 per share in cash and slightly less than 0.46 shares of stock for each share of Ladish. That is a total deal value of about $778 million (prior to the post-announcement moves in the stocks) or slightly more than 14 times Ladish's trailing EBITDA. For Ladish shareholders, it also represents more than a 63% premium to the prior night's closing price, but a roughly 17% discount to the company's all-time high back in mid-October of 2007.

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