Rising Global Defense Budgets Will Fuel Naval Modernization

Key Takeaways

• Investments in workforce, technology, and digitalization could drive sustained growth, margin expansion, and unlock higher returns than analyst expectations.
  
• Rising global defense spending, international partnerships, and high-tech offerings position the company for outsized backlog, earnings growth, and revenue diversification.
  
• Overdependence on traditional large Navy contracts, workforce shortages, and technological transitions pose major risks to revenue stability, margins, and long-term competitiveness.

Catalysts

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

• While analyst consensus focuses on a 20% year-over-year improvement in throughput and moderate revenue gains, it is likely underestimating the compounding effects of internal and congressional investments, as well as a surging labor pipeline, which could catalyze a step-change in throughput and drive sustained double-digit top-line growth into future years rather than a one-time bump in revenues.
  
• Analyst consensus cites $250 million in annualized cost reductions and modest margin expansion, but given technology partnerships (e.g., with C3 AI), digitalization, and workforce upskilling, HII could unlock not only far higher fixed-cost leverage but also a structurally higher net margin profile-potentially several hundred basis points above historic levels if digital shipbuilding and supply chain optimization reach scale.
  
• HII stands to be a primary beneficiary of a long-term, secular increase in global defense budgets driven by intensifying geopolitical tensions and maritime security focus, which should drive multi-year backlog expansion and earnings visibility well beyond what is currently priced in.
  
• The underappreciated Mission Technologies segment-which combines advanced cyber, autonomy, training, and data analytics-is positioned for outsized growth and margin accretion as military digitization and demand for high-tech, software-driven defense solutions accelerates, supporting material free cash flow and EPS upside.
  
• HII's deepening international footprint and partnerships, especially in the context of AUKUS and collaboration with global shipbuilders such as HD Hyundai, could unlock new high-margin contract streams and international revenue diversification, adding a structural growth vector for revenue and margin beyond U.S. defense cycles.

Huntington Ingalls Industries Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Huntington Ingalls Industries compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Huntington Ingalls Industries's revenue will grow by 7.0% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 4.5% today to 6.6% in 3 years time.
• The bullish analysts expect earnings to reach $934.1 million (and earnings per share of $23.82) by about August 2028, up from $525.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 17.1x on those 2028 earnings, down from 20.0x today. This future PE is lower than the current PE for the US Aerospace & Defense industry at 33.9x.
• Analysts expect the number of shares outstanding to grow by 0.06% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.21%, as per the Simply Wall St company report.

Huntington Ingalls Industries Future Earnings Per Share Growth

Risks

• HII's heavy reliance on long-cycle, large US Navy contracts, such as the Virginia-class submarine and aircraft carrier programs, exposes its future revenues and earnings to significant disruption if contract awards are delayed, canceled, or face unfavorable budgetary shifts in federal defense spending.
  
• The company is grappling with persistent labor shortages and escalating wage inflation, particularly in specialist trades at Newport News and Ingalls, which could continue to pressure net margins and result in operational delays, as evidenced by ongoing throughput and retention challenges discussed in the call.
  
• Delays, cost overruns, and execution risks tied to the shift toward digital shipbuilding and technology investments, including partnerships like C3 AI, may increase R&D spending and capital needs, negatively impacting both earnings and free cash flow for several years if expected efficiencies are not realized in line with management projections.
  
• Sector-wide advances toward unmanned and autonomous naval platforms, as well as shifting Pentagon priorities toward AI, hypersonics, and cyber/space defense, could reduce demand for the traditional large manned ships that currently underpin HII's core revenue base, undermining long-term revenue sustainability.
  
• Heightened environmental scrutiny and potential tightening of regulations on shipbuilding emissions and processes could lead to increased compliance costs, which would erode profitability and potentially make HII less competitive relative to lower-cost or more technologically advanced international shipbuilders, thus impacting margins and future market share.

Valuation

• The assumed bullish price target for Huntington Ingalls Industries is $324.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Huntington Ingalls Industries's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $324.0, and the most bearish reporting a price target of just $221.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $14.2 billion, earnings will come to $934.1 million, and it would be trading on a PE ratio of 17.1x, assuming you use a discount rate of 8.2%.
• Given the current share price of $267.46, the bullish analyst price target of $324.0 is 17.5% higher.
• 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.