20% Throughput Improvement And Workforce Investments Will Drive Success

Key Takeaways

• Focus on shipbuilding efficiency and cost reductions is set to enhance revenues and net margins, boosting financial performance.
  
• Strategic alignment with defense priorities and partnerships is expected to drive demand and potentially secure new contracts, supporting revenue growth.
  
• Delays in shipbuilding projects and complex labor negotiations could impact costs, timelines, and future profitability, reflecting operational and revenue challenges.

Catalysts

Designs, builds, overhauls, and repairs military ships in the United States.

• HII is focused on improving shipbuilding throughput by 20% year-over-year, which is expected to lead to higher revenues as more projects are completed on schedule.
  
• The company aims to achieve $250 million in annualized cost reductions by year's end, potentially enhancing net margins through reduced operational costs.
  
• Strategic focus in alignment with defense priorities and new executive orders could lead to increased demand and new contracts, positively impacting revenue growth.
  
• The recent 2-boat Virginia-class submarine contract includes targeted investments for workforce development, which should improve productivity and positively affect earnings through increased throughput.
  
• Engagement in outsourcing and partnerships, such as the MOU with HD Hyundai Heavy Industries, may enhance production capabilities and accelerate shipbuilding, leading to potential revenue and earnings growth.

Huntington Ingalls Industries Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Huntington Ingalls Industries's revenue will grow by 5.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.8% today to 5.5% in 3 years time.
• Analysts expect earnings to reach $737.6 million (and earnings per share of $19.5) by about May 2028, up from $546.0 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $812.3 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.2x on those 2028 earnings, down from 16.7x today. This future PE is lower than the current PE for the US Aerospace & Defense industry at 32.4x.
• Analysts expect the number of shares outstanding to decline by 0.49% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.34%, as per the Simply Wall St company report.

Huntington Ingalls Industries Future Earnings Per Share Growth

Risks

• The delays in Newport News Shipbuilding, especially concerning the CVN 80 due to late major equipment, could limit progress and impact expected revenue timelines.
  
• The reduction in first-quarter revenue and revenues from key segments like Newport News Shipbuilding, Ingalls Shipbuilding, and Mission Technologies suggest ongoing challenges that could affect future earnings.
  
• The ongoing cost-reduction efforts, while necessary, imply operational challenges and potential margin pressures if unachieved, which might affect net margins adversely.
  
• The complex labor negotiations and the need to enhance wages for improved attrition could increase costs, impacting future profitability and net earnings.
  
• The shift to a cost-plus contract for the 2-boat Virginia-class contract reflects uncertainty or risk in cost management, potentially affecting future net margins and earnings stability.

Valuation

• The analysts have a consensus price target of $239.009 for Huntington Ingalls Industries based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $316.0, and the most bearish reporting a price target of just $166.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $13.3 billion, earnings will come to $737.6 million, and it would be trading on a PE ratio of 15.2x, assuming you use a discount rate of 7.3%.
  
• Given the current share price of $232.9, the analyst price target of $239.01 is 2.6% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.