Huntington Ingalls Industries Inc. (HII) Has 27% Upside Potential

Huntington Ingalls Industries Inc. (NYSE: HII) is a mid-cap defense contractor that builds destroyers, aircraft carriers, and nuclear submarines for the U.S Navy, U.S Coast Guard, and allies. Valuation, healthy fundamentals, and competitive moat suggest 27% upside to current price, according to a bullish thesis on Reddit.

Huntington was spun off Northrop Grumman’s shipbuilding segment in 2011 and has steadily grown ever since then. The business comprises of three segments: Ingalls produces assault ships, surface combatants, and cutters; Newport produces nuclear submarines and aircraft carriers; and Technical Solutions offers consulting services to the United States Department of Defense (DoD) and private sector companies.

Talking about fundamentals, the thesis mentions that median revenue growth is 5.3% which is expected considering that 87% of the company’s revenues come from the DoD, and consistent ROIC growth from 11% to 19% over 10 years, compared to industry average of 5.9%. It has an operating income CAGR of 13.6%, while healthy backlog of $46.5 billion, cash flows should be safe over the next few years.


Value of equity per share is $197.20, while the stock was trading at $144.13, according to the thesis.

Discount rate: 4.62% given exposure to mostly U.S based customers, low cost of debt.

Revenues: Negative growth next year due to the pandemic, adjusted to 3% as defense spending increases. Management has been focusing on expanding the Technical Solutions segment which should increase growth over the long term.

Huntington was heavily hit by the pandemic due to the shipyards only being allowed to operate at 65% capacity. However, product demand was relatively unaffected. As the company implements safety protocols, operation capacity should be expected to back to normal levels in a few years.

Risks to thesis are U.S. elections and COVID-19. Defense stocks are almost always volatile during election years, although neither President Trump nor Biden are planning any defense spending cuts. Volatility is expected in the near term. Meanwhile, future lockdowns and outbreaks are likely to affect production and impact margins.

Our calculations also showed that HII isn’t among the 30 most popular stocks among hedge funds. The stock was in 30 funds’ portfolios at the end of June, a change of 43% from the first quarter of 2020 when there were 21 funds in our database with HII positions.

Disclosure: None. This article is originally published at Insider Monkey.