Huntington Ingalls Industries, Inc. (NYSE:HII) shares have returned a modest 6% over the past twelve months but that might be on the cusp of changing.
As the biggest military shipbuilder in America, Huntington has a history spanning 135 years supporting US defenses. And its programs are backed by strong bipartisan support.
This was evident in the last Defense Appropriations Act that funds Arleigh Burke-class destroyers, Virginia-class attack submarines, and a Columbia-class ballistic submarine. The act also provides $500 million for advanced procurement of an amphibious warship, called LPD 33.
The capital infusion highlights how key a role Huntington’s shipbuilding plays in US defenses, and ensures a constant supply of contracts and income.
With stable revenues and support broadly from Congress, the long-term future looks bright for Huntington but what about the share price?
Huntington Free Cash Flow Forecasts Bright
Sales and service revenues in Q1 2024 rose by 4.9% to $2.81 billion year-over-year. Operating income also increased at a growth rate of 9.2% from the prior year to $154 million.
Net earnings and earnings per share increased also by 18.6% and 19.8%, respectively. In absolute terms, the figures ended up at $153 million and $3.87 per share.
Besides solid sales, the Mission Technologies segment of Huntington has remained highly successful in landing contracts with $80 million in the pipeline.
Additionally, Huntington has begun the year well and anticipates free cash flow of between $600 million and $700 million. The cash flow projection highlights the company’s financial stability and ability to finance future growth.
Better yet, the 5-year free cash flow is forecast to be $3.6 billion, indicating predictable and stable financials for the foreseeable future.
1 Standout Feature of Huntington
Huntington stands out on one key dimension, its fundamentals. The company has a perfect Piotroski Score of 9, indicating rock solid financials.
That’s also evident in the 12-year dividend growth streak. As an aside, the dividend now sits at 2.15% but what’s arguably more attractive is the low payout ratio of just 28.6% that indicates substantial room for increases over time.
Across a host of measures, Huntington looks really good. For example, the price-to-earnings ratio is just 13.5x, meaningfully below the 15x line in the sand that Buffett is widely regarded as favoring.
With net income set to increase at an annualized pace of 6.8% over the next 5 years, it’s clear that the PEG ratio is appetizing, to say the least. The PEG is just 0.54 and suggests that the earnings multiple is low relative to the growth rate.
Is Huntington Ingalls a Good Stock to Buy?
The price target of $285.54 per share set by 13 analysts collectively suggests Huntington Ingalls is a good stock to buy with meaningful upside of 19.9%.
Whether we look at a discounted cash flow forecast or analysts price targets, the results are similar. A DCF calculation for example reveals fair value of close to $282 per share.
That is no surprise really when you look to the bottom line that has been consistently profitable for as far back as we can see. To be clear, a 10-year analysis reveals the stock has been profitable in each and every year.
Over that same time frame, the share price has risen from around $70 per share to current levels around 3x higher. This is very much a slow and steady play that tends to carve out gains year after year with good predictability but don’t expect it to surprise to the upside akin to a company like Nvidia.
If there were a major drawback to the stock it would be relative lack of earnings growth and the gross margins that aren’t stellar. This is more like a company that spits out profits with high predictability and is usually, though not always, free cash flow positive.
It’s not the type of stock that generally incurs many upside or downside surprises, so for those who want exposure to the defense industry, and prefer a steady eddy, this might well be the right fit.
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