As announced to the market recently, ASX-listed defence contractor Austal Limited (ASX: ASB) has won a further US$11 million dollar contract to 'provide engineering and management services for advance planning and design in support of the Post Shakedown Availability for Littoral Combat Ship USS Jackson (LCS 6).'
The work is expected to be completed by September 2016, and will be conducted mostly at Austal's shipyards in Alabama and Virginia.
There are a few things to take away from this announcement. Firstly, the USS Jackson is but one of ten LCS craft being built by Austal – which has the contract to manufacture numbers 6, 8, 10, 12, 14, 16, 18, and 20.
This means plenty of opportunity to win further work on the later vessels, and initial contracts are clearly a pat on the back for Austal given the highly competitive nature of US defence contracting.
Secondly, these contracts are all in US$ figures, which result in a pleasing benefit to Austal's financial results – it's no surprise the company has jumped 98% in 2015 alone.
Thirdly, and most relevant, is Austal's slim margins on the work it conducts. The average margin achieved in the first half (1H) of 2015 was 5.5% (1H 2014: 6.4%).
This means that of ~$498 million in revenue earned in 1H 2015, only ~$27 million accrued as Earnings Before Interest and Tax (EBIT). This means that while Austal's contract wins look impressive in dollar terms, the actual impact on the company's earnings is much smaller.
So despite a number of factors making Austal look like an appealing investment – growing US$ earnings, low price to earnings multiple, a foothold in government defence contracting – the company looks a little too risky for my liking.
Too much depends on the maintenance of those margins, and the company's price rise in 2015 makes it look as though much (but not all) of the upside has already been taken off the table.
That's not the case at one company recently identified by The Motley Fool's analysts however, and given double digit profit growth and ambitious plans for overseas expansion, this is one opportunity you literally can't afford to miss.
