Huntington Ingalls: Best in Defense

04/17/2019 5:00 am EST

Focus: INDUSTRIALS

Peter Mantas

CIO, Logos LP

Although value is becoming more and more difficult to find (the S&P 500 is near fair value at current levels considering a slowdown in earnings) there are pockets within the market that are worth looking into, notes value investor Peter Mantas of Logos LP.

One high quality value that we think will outperform the overall market is Huntington Ingalls Industries (HII) — which was spun-off from Northrop Grumman (NOC) back in 2011. We believe that  the firm is the best stock in the defense sector.

An October 2018 paper from the US Navy provided a strong assessment of the US Government's Naval needs and where the Navy should be over the next 30 years with respect to naval ships backlog.

The Navy made the proposal to create one of the largest shipbuilding proposals since Reagan, as a number of major ships (nuclear, non-nuclear, submarines etc.) have not been updated in decades.

The company has a $22 billion backlog which will continue to grow given the ongoing needs and strategic nature of the US Navy versus the rest of the armed forces. HII has a wide moat in our opinion as the company will be the single largest beneficiary of the largest shipbuilding era the US has ever seen. 

However, there is also another catalyst to HII's growth, which is their Technical Advisory business unit. This business unit provides IT, cybersecurity and other professional services to the US Government and large multinationals like Boeing.

The company entered into a bear market in Q4 of 2018 and provided tremendous value in December, but we believe it is not too late to enter into the stock. We have a 2-year price target of $303.91 per share.

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