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Huntington Ingalls: America's Shipbuilder

07/06/2020 5:00 am EST

Focus: INDUSTRIALS

Douglas Gerlach

President, ICLUBcentral, Inc.

Huntington Ingalls (HII) is America’s premier military shipbuilder and a provider of professional services to its customers in government and industry, observes Douglas Gerlach, editor of Investor Advisory Service.

The company, which was spun-off from Northrop Grumman (NOC) in 2011, has designed, manufactured, and maintained nuclear and non-nuclear ships for the U.S. Navy and Coast Guard for more than a century.

Approximately 95% of revenue is derived from the U.S. Government, primarily the Department of Defense, via participation in high-priority defense programs, with the remainder coming from commercial customers.

The largest segment, Newport News in Virginia, contributes nearly 60% of revenue, and encompasses all nuclear ship design and construction.

 Newport News serves as the sole source of nuclear-powered aircraft carriers, building more than 30 aircraft carriers for the U.S. Navy since 1933, and is also one of two companies in the U.S. capable of designing and building nuclear-powered submarines for the Navy.

Contracts awarded in 2019 more than doubled Huntington Ingalls’ backlog, which now stands at over $45 billion compared to 2019 revenue of just under $9 billion. This recent growth in backlog included awards to build two new aircraft carriers and nine submarines.

Acquisitions have been part of the playbook at Huntington Ingalls, and the recent acquisition of Hydroid, a provider of advanced marine robotics to the defense and maritime industry, is a good recent example. This acquisition was consistent with management’s continued focus on unmanned undersea vehicles.

Projecting 7% EPS growth over the next five years and a high P/E of 18.2, we get a potential high price of $374. Applying a low P/E of 12.5 to last fiscal year’s EPS of 13.26 yields a low price of $166. Therefore, we model an upside/downside ratio of 11.6 to 1 and a projected high total return of over 16% annually.

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