Huntington Ingalls Industries, Inc. – A Due Diligence

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PUGET SOUND, Wash. (May 22, 2017) The Ohio-class ballistic-missile submarine USS Louisiana (SSBN 743) transits the Hood Canal as it returns to its homeport following a strategic deterrent patrol. Louisiana is one of eight ballistic-missile submarines stationed at Naval Base Kitsap-Bangor providing the most survivable leg of the strategic deterrence triad for the United States. (U.S. Navy photo by Lt. Cmdr. Michael Smith/Released)

[NYSE:HII]

The Company
Huntington Ingalls Industries, inc. was founded on March 31, 2011 when Northrop Grumman spun off their shipbuilding sector as an independent, publicly traded company. They pride themselves in being the sole builder of the U.S. Navy’s aircraft carriers, and their only competition in the nuclear powered submarine market is General Dynamics [NYSE:GD]. While their focus is mainly on shipbuilding, they’ve been expanding out into information technology, nuclear management and operations, oil and gas engineering and support, and fleet maintenance/modernization.

Having two shipyards at their disposal with a cumulative 210+ years of use and over 1300 ships built in that time, Huntington Ingalls holds a niche like no other ship builder. Newport News Shipbuilding, of Newport News, VA, is the primary location and known as the world’s most capable shipyard, giving HII a reputation as the nation’s largest shipbuilder. Newport News Shipbuilding was started by Collis P. Huntington in 1886. Northrop Grumman purchased the shipyard in December 2001, despite competition by General Dynamics. Huntington Ingalls Industries’ corporate office finds its home at this location, and it happens to be the largest industrial employer in Virginia.

 

Financials
Revenue has remained largely consistent and net income has increased over the last four years. Operating cash flow has been strong, and free cash flow has been relatively powerful as well. Having steadily lowered their debt, a P/E of 15.7, and a $20 billion-dollar backlog immediately brings forward financial security in an investment in Huntington Ingalls Industries. A consistent, growing dividend and steady, market-index beating yearly performance only add to that confidence.

 

Risks to Consider
No company is without its share of risks, and Huntington Ingalls Industries is no exception. A U.S. Government contractor, the company relies heavily on continued defense spending. With a large backlog of contracts, they should be able to make it through just fine despite cuts, but it’s still a factor to consider. On top of this, inability to perform under contracts, competition in the market from the likes of General Dynamics, new regulations, disruption from natural or environmental disasters, or simply being unsuccessful in negotiations for bargaining agreements could all create an adverse effect on the bottom line.

 

Stock Trends and Outlook
On June 16, the share value dropped about 5%. From what I understand, it may be attributed to the fact that the new electronic catapult system employed in their aircraft carriers is not performing as needed. Even the president has called on this new, faulty system being replaced with the old steam setup. This is no fault of HII, however- General Atomics, the makers of the Reaper and Predator drones, developed this catapult system and are currently in the hot seat as a result.

Nevertheless, the stock has dropped 5% on the 16th, following a 6.4% drop due to a rare, poor earnings report. After hours on the same date, however, Huntington Ingalls received a massive $3 billion-dollar contract for a new ship, the LHA-8. With the latest drop being unjustified, this new contract being introduced, and the next earnings report being at the start of august, I think that this is an opportune moment to consider a position in Huntington Ingalls Industries.

Disclosure Statement:
As of June 19, 2017, I hold a small position in Huntington Ingalls Industries, at approximately $186 per share. I release this information for the sake of transparency.

 

 

Sources:
Cover Image, USS Louisiana, U.S. Navy photo by Lt. Cmdr. Michael Smith
Company History, Huntington Ingalls Industries Investor Relations Page
Financial Information, Finviz
Financial Information, GuruFocus

1 COMMENT

  1. […] Since the end of June, Huntington Ingalls’ share value as been recovering nicely. These new contracts rolling out further bolster their already decent financial position. Having two shipyards at their disposal with a cumulative 210+ years of use and over 1300 ships built in that time, Huntington Ingalls holds a niche like no other ship builder. Read more about it in my Due Diligence report, here. […]