An Investment In Orbital ATK Could Yield A 14% Return From These Levels

Argus upgraded shares of Orbital ATK Inc OA from Hold to Buy, citing favorable valuation metrics relative to peers and prospects for stronger cash flow. The firm's $120 price target implies a total potential return, including the dividend of 14 percent from current levels.

Orbital shares were up 2.9 percent at $109.67.

Orbital ATK is a company that came into being from the merger of Orbital Sciences Corp. and the aerospace and defense groups of Alliant Techsystems.

Analyst David Coleman believes the company's earnings trajectory is promising relative to peers despite operating margins falling in all segments in the first half of 2017. The analyst noted the company expects acceleration in earnings and revenues in the second half.

"OA also expects to hit certain operational milestones in the second half that will provide significant free cash flow, and should benefit from a likely increase in U.S. defense spending in 2017-2018," the firm said.

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Argus also noted the company's shares have recovered since the time they fell sharply in reaction to its announcement last August that it would restate results back to 2013 to correct more than $200 million in overstated earnings on a 10-year $2.3 billion government contract.

In the year-to-date period, Argus noted that Orbital ATK shares were up 21.2 percent compared to a 9.7 percent gain for the S&P 500. The firm also pointed to the company's second quarter earnings released on August 3, which showed a decline in adjusted net income per share that was not as worse as feared and 2.9 percent revenue growth.

The company also raised its earnings per share and revenue guidance for the full year, the firm added.