Huntington Ingalls Industries (HII) builds nuclear and non-nuclear ships for the U.S. Department of Defense, observes Ben Reynolds, income expert and editor of Sure Dividend.
Huntington Ingalls Industries was founded in 2011 as a spin-off from Northrop Grumman (NOC) and trades at a market capitalization of $5.7 billion. Some of its highest profile products include aircraft carriers and submarines.
A bright spot for the company is its backlog which stands at a healthy $46.1 billion, implying plenty of business for the years to come as its primarily government customer base is very resistant to recessions.
The company's biggest competitive advantage is its entrenched positioning within the U.S. military industrial complex.
With established relationships in the Pentagon and with other defense contractors, Huntington Ingalls has the connections and intellectual property that make it very difficult for a competitor to completely displace it or even eat into its pricing power in any meaningful way.
Additionally, the types of products it produces are not only major in cost and scope, meaning that contracts are typically longer term in scope and costly for the government to cancel; but these products also require considerable maintenance services that also demand a high degree of specialization, which Huntington Ingalls is obviously well-positioned to offer.
We expect Huntington Ingalls Industries to grow earnings-per-share at a rate of 5% per year through 2025 as the continued ascendancy of the rival Chinese navy will force the U.S. government to continue allocating even more funds to their own naval fleet.
Furthermore, improving naval technologies tend to drive ship prices higher and therefore generate greater revenues for Huntington Ingalls.
Huntington Ingalls Industries stock trades for a price-to-earnings ratio of 9.7, based on expected earnings-per-share of $14.49 for this year.
Our fair value estimate for the stock is a price-to-earnings ratio of 15, so the stock is significantly undervalued after a recent decline. Multiple expansion could add approximately 9.1% to shareholder returns per year over the next five years.
Combining this tailwind with earnings-per-share growth (5%) and the current dividend yield (2.9%), gives us expected annualized total returns of 17.0% per year over the next five years.
