Alliant Techsystems (ATK) is expected to face decreased demand on both the commercial and the defense side of its ammunition business, as the stockpiling of ammunition by civilians winds down after legislative concerns, and the wars in Afghanistan and Iraq wind down and defense budgets decline, says Michael F. Ciarmoli, Vice President and Equity Research Analyst at KeyBanc Capital Markets Inc.
“First, on the military side, with the wars in Afghanistan and Iraq winding down, we expect there to be less demand for ammunition in the field. We also couple that with the budget pressures hitting the Pentagon and what will likely be force structure cuts, specifically to the Army and Marine Corps. We are seeing curtailments of training. We think that’s all going to hit military ammo demand and production, and we see ammo funding potentially falling by as much as 40% to 50% over the next five years,” Ciarmoli said.
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Ciarmoli has an “underweight” rating on ATK, and he says that although the stock has seen a good run relative to its defense peers, there are profitability headwinds as more normal patterns resume.
“We do think, as we start to see more normal buying practices, or just a cooling off of some of these legislative concerns, that will pressure some of their commercial ammunition revenues as well. The stock has had a very good run; it’s been one of the outperformers within the defense sector. I think a lot of that stems from the company shoring up its balance sheet and, again, some of this increased activity around gun legislation, which has really stoked the sales of their commercial ammunition,” Ciarmoli said.
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