Huntington Ingalls: In the Navy

10/18/2013 8:00 am EST


Charles Mizrahi

Editor, Insider Alert

Our latest featured stock is engaged in building, overhauling, and repairing ships, mainly for the US Navy and the US Coast Guard, notes Charles Mizrahi, editor of Hidden Values Alert.

Huntington Ingalls Industries (HII) controls a monopoly on building US Navy aircraft carriers. It also belongs to an oligopoly with General Dynamics for construction of the US Navy's submarine fleet.

The company also provides refueling and overhaul services for nuclear-powered aircraft carriers.

In 2012, its non-nuclear segment accounted for close to 40% of total sales. The company is either the sole provider, or among a select few, of several different assault and warfare ships.

It is one of only two companies with this government clearance for assembling aircraft carriers and submarines for national defense. This segment accounted for nearly 60% of 2012 total revenue.

These two competitive advantages ensure the company's success going forward. This exclusivity serves as a barrier to entry for potential competitors wishing to enter the industry.

HII received a larger share than General Dynamics of a $6.1 billion US Navy order for nine new destroyers. The company received more than half of the deal ($3.33 billion) to be paid out over ten years. The company would earn a profit of 14% on the contract.

HII had backlog of $21 billion as of June 2013. Around a third of 2012 backlog ($16 billion) was converted into sales of a little more than $5 billion.

The ability to retain its customer and generate recurring revenues allows the company to lock in profits and benefit from an uncertain federal government environment.

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