Orbital ATK is an aerospace and defense company. Prior to February 2015, the company was known as Alliant Techsystems. The company designs, builds and delivers space, defense and aviation-related systems both as a prime contractor and as a merchant supplier. Its main products include launch vehicles and related propulsion systems; satellites and associated components and services; composite aerospace structures; tactical missiles, subsystems and defense electronics; and precision weapons, armament systems and ammunition. Listed industry peers include Elbit Systems Ltd., Lockheed Martin, and Rockwell Collins.
Future Value
My short-term (3-6 week hold) target price for the stock is $142.21, with an initial trailing stop at $130.90. My future (5 year hold) target price for the stock is $362, which is an average annual return of 35%. A prior five year hold of the stock would have returned an average of 76% per year. Please be aware that past and future gains are based on actual and anticipated earnings. Please also be reminded that any investment has the potential for loss, and past performance is no guarantee of future results.
The Tax Act
The Tax Cuts and Jobs Act of 2017 makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35% to 21%; (2) requiring companies to pay a one-time deemed repatriation transition tax (the “Transition Tax”) on certain earnings of foreign subsidiaries; (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (4) requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations; (5) eliminating the corporate alternative minimum tax (“AMT”) and changing how AMT credits can be realized; (6) capital expensing; (7) eliminating the deduction on U.S. manufacturing activities; and (8) creating new limitations on deductible interest expense and executive compensation.
The Securities Exchange Commission staff issued Staff Accounting Bulletin (“SAB”) 118 which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.
It is important to note that income tax adjustments required on repatriated earnings will distort a companies earnings and consequently its fair value.
In the case of Orbital ATK, Inc., the company recognized income tax expense of $39 million for the year ended December 31, 2017 and a corresponding $39 million decrease in net deferred tax assets as of December 31, 2017 related to the remeasurement of deferred tax assets and liabilities to reflect the reduction in the U.S. corporate income tax rate from 35% to 21%, both which are complete under SAB 118.
The company’s accounting for the following effects of the Tax Act are not complete: (1) cost recovery, (2) limitation on the deductibility of certain executive compensation, (3) recovery of Alternative Minimum Tax credits and (4) valuation allowances against state tax attribute carryforwards. The Company was able to make reasonable estimates of certain effects and, therefore recorded provisional adjustments for such effects, none of which were material. The company expects to finalize all provisional and non-estimable amounts within the measurement period as described in SAB 118.
Insider Transactions
For FY17, the company recorded 101 insider trades involving 182,536 shares of stock. Of the 101 insider trades, 32 were Buys involving 102,483 shares of stock, and 69 were Sells involving 80,053 shares of stock, creating an insider buy to sell ratio of 1.3:1.
Fair Warning
Fair warning means that the time for bidding has ended and a sale is about to be concluded. In the case of Orbital ATK, Inc. (NYSE: OA) – FYE 12/2017 the stock is OVER VALUED, and is currently trading at levels above my most recent $42 close target. Please See Linked PDF Worksheet
Disclosure
I hold no shares of Orbital ATK, Inc. in my portfolio.
Posted on 04/05/18
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