Huntington Ingalls: Overhauling the Navy

Focus: Industrials

Peter Mantas Image Peter Mantas CIO, Logos LP

Huntington Ingalls Industries (HII) is a defense contractor for the U.S. Navy that has significant upside potential, explains Montreal-based money manager and value investor Peter Mantas in his Logos LP blog.

The company was spun-off from Northrop Grumman (NOC) in 2011. It is the largest military shipbuilder in the U.S., with over 70% market share in the construction and repair of nuclear-powered ships and ballistic missile submarines built at the Newport News and Ingalls port, the largest shipbuilding ports in the U.S.

HII has a strong operating profile over the past 7 years: gross margins have grown roughly 53%, free cash flow has nearly quadrupled, book value per share has grown over 50%, and return on invested capital has grown from 8.30% in 2012 to 21.35% in 2017, with the last 4 year average being in the mid-to-high double digits.

The company also has tailwinds that we believe are quite significant going into 2030; HII has a backlog of over $20 billion and growing - they recently won another $3 billion contract from the Navy - of which 50% has already been committed.

The Navy is in desperate need of an overhaul, with new ships and vessels required sooner rather than later and government budgets dedicated to fulfill their cause. Moreover, given this pent up demand, a number of legacy ships are under a replacement cycle.

Further, with President Trump's renewed focus and vow to build 350 ships for the U.S.