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Short Interest Swings in Defense Stocks (ATK, FLIR, LLL)

February 28, 2013 4:48 pm
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Short Interest Swings in Defense Stocks (ATK, FLIR, LLL)

The short interest in defense companies was mixed during the first two weeks of February, despite the threat of major federal budget cuts at the end of the month.

The number of shares sold short in General Dynamics (NYSE: GD), Huntington Ingalls (NYSE: HII), Raytheon (NYSE: RTN), Rockwell Collins (NYSE: COL) and Textron (NYSE: TXT) increased somewhat between the January 31 and February 15 settlement dates.

But short interest in Esterline Technologies (NYSE: ESL), HEICO (NYSE: HEI), Hexel (NYSE: HXL), Northrop Grumman (NYSE: NOC), TransDigm (NYSE: TDG) and United Technologies (NYSE: UTX) declined during that time.

Three defense companies saw larger swings in short interest between the January 31 and February 15 settlement dates. They were and Alliant Techsystems (NYSE: ATK), FLIR Systems (NASDAQ: FLIR) and L-3 Communications (NYSE: LLL).

Alliant Techsystems

This maker of ammunition, rocket motors and other products saw short interest rise about 15 percent in early February to more than 785,000 shares, the greatest number of shares sold short in at least a year. That followed a 13 percent rise in the previous period. Short interest is more than two percent of the float.

Alliant Techsystems got a land mine contract in early February and reported strong earnings in its most recent quarterly report. The company now has a market capitalization of more than $2 billion and a dividend yield near 1.6 percent. The return on equity is almost 19 percent and the price-to-earnings (P/E) ratio is less than the industry average.

But of the 12 analysts who follow the stock that were surveyed by Thomson/First Call, three recommend buying shares and three recommend selling. Their mean price target, or where they expect the share price to go, is about the same as the current share price. So the consensus currently is that analysts see no upside potential in Alliant Techsystems.

The share price is up more than four percent year to date and more than 33 percent over the past six months. The stock has outperformed General Dynamics and Raytheon in that time, as well as the broader markets.

FLIR Systems

Shares sold short in this manufacturer of thermal imaging systems rose about 31 percent to about 2.58 million, the highest level of short interest since October. The average daily volume was the greatest since July of 2012. The short interest is less than two percent of the total float.

This Oregon-based company has a market cap of about $14 billion and a dividend yield near 1.4 percent. It posted better-than-expected earnings in the most recent quarterly report, but its revenues fell short of estimates. FLIR Systems’ long-term earnings per share (EPS) growth forecast is more than 12 percent. The P/E ratio is greater than the industry average, but so is its operating margin.

Out of 11 analysts polled, only four recommend buying shares, and six of them rate shares at Hold. The analysts’ mean price target indicates upside potential of only about three percent. But that target is higher than the recent 52-week high.

The share price is up more than 12 percent year to date, most of that coming in a surge following the earnings report. Over the past six months, the stock has outperformed competitor L-3 Communications.

L-3 Communications

Short interest in defense contractor L-3 Communications increased more than 28 percent in the period to 4.56 million shares. That is the highest number of shares sold short in at least a year, and it represents about five percent of the company’s float. The days to cover is less than five.

In early February, this maker of communications, intelligence, surveillance and reconnaissance systems hiked its divided and approved a new share buyback plan. The company has a market cap of more than $7 billion. The P/E ratio is less than the industry average, but the long-term EPS growth forecast is less than seven percent. The dividend yield is about 2.9 percent.

The consensus recommendation of 15 surveyed analysts is to hold the shares, and it has been for at least three months. They believe the shares have little room to grow, as their mean price target is about two percent higher than the current share price. That target is less than the 52-week high.

Despite pulling back recently, shares are still more than 10 percent higher than six months ago. Over that time, the stock has outperformed Raytheon and the broader markets.

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