Huntington Ingalls: Rising Tide for the Navy?

12/23/2016 7:00 am EST

Focus: STOCKS

Tony Daltorio

Editor, Investors Alley Premium Digest

something different, here's one under-the-radar defense stock that should enjoy a major boost in a Trump administration, suggests Tony Daltorio, editor of Ian Wyatt's Daily Profit.

There is an old adage that says "a rising tide lifts all boats." That looks to be especially true under Trump for anything connected with the U.S. Navy.

Trump and his hawkish Cabinet choices, such as Defense Secretary nominee General James 'Mad Dog' Mattis, are all in support of expanding the Navy.

This probably benefits no company more than Huntington Ingalls Industries (HII). It has become a successful standalone company since its spin-off from Northrop Grumman (NOC) in 2011.

The company was formerly known as Northrop Grumman Shipbuilding. It was formed in 2008 by a merger between Northrop Grumman Ship Systems and Northrop Grumman Newport News.

Huntington Ingalls pretty much has one customer -– the U.S. government in the form of the Defense Department, the U.S. Navy and the U.S. Coast Guard.

The company is the sole builder of nuclear-powered aircraft carriers. It also builds nuclear submarines and is the largest supplier of U.S. Navy surface combat ships, such as guided missile destroyers.

And HII is a major supplier of amphibious ships, including the Navy's latest San Antonio class amphibious assault ships.

The company has managed to improve its profit margins since the spin-off to 11% from 6%. While revenues haven't risen much since the spin-off ($6.6 billion to $7 billion), the backlog of $22 billion as of the end of 2015 is solid.

The balance sheet is very solid too. After including the $1 billion in cash held, the net debt is only $300 million.

With more business thanks to Trump, I'd expect the company to continue raising both its cash dividend and stock buybacks.

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