Innovative Manufacturing And Critical Contracts Propel Growth In The Defense Sector

Key Takeaways

• Long-term revenue visibility and growth are bolstered by substantial multi-ship and electronic warfare contracts.
  
• Investments in workforce and manufacturing aim to optimize efficiency, improving net margins and production capacity.
  
• Delays in submarine contracts and supply chain issues may impact Huntington Ingalls' revenue, margins, cash flow, and shareholder returns.

Catalysts

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

• The $9.6 billion award for the multi-ship procurement of amphibious warships provides strong revenue visibility for years to come, impacting revenue growth positively.
  
• Mission Technologies division's growth, including significant contract wins totaling $11 billion, such as a $6.7 billion electronic warfare engineering contract, is likely to drive higher revenue and earnings.
  
• Investments in workforce training and innovative manufacturing technologies aim to improve labor efficiency, thereby potentially enhancing both revenue through increased throughput and net margins by reducing costs associated with inefficiencies.
  
• Outsourcing additional work and leveraging new suppliers are steps aimed at rebuilding the industrial base, which should increase production capacity and improve revenue visibility.
  
• Management's focus on securing contracts that reflect the current economic realities, including the possibility of obtaining fairer terms for new submarine contracts, could enhance shipbuilding margins.

Huntington Ingalls Industries Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Huntington Ingalls Industries's revenue will grow by 3.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 6.0% today to 5.9% in 3 years time.
• Analysts expect earnings to reach $777.3 million (and earnings per share of $20.29) by about November 2027, up from $701.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $649.2 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.7x on those 2027 earnings, up from 10.7x today. This future PE is lower than the current PE for the US Aerospace & Defense industry at 34.3x.
• Analysts expect the number of shares outstanding to decline by 0.7% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.65%, as per the Simply Wall St company report.

Huntington Ingalls Industries Future Earnings Per Share Growth

Risks

• The uncertainty and delays in reaching agreements on significant submarine contracts, including the Virginia-class Block V and Block VI, could impact Huntington Ingalls' future revenues and cash flow as existing profitability and cash flow assumptions have to be updated.
  
• Issues with performance improvement and risk reduction due to late material deliveries and inexperience in the workforce could negatively affect program schedules, thus impacting margins and earnings.
  
• The ongoing reliance on older contracts that were negotiated before COVID, which did not account for inflation or supply chain disruptions, may continue affecting the company's ability to meet cost targets, impacting net margins and earnings.
  
• The fragile supply chain and labor inefficiency, which result in rework and cost increases, could hinder Huntington Ingalls' ability to achieve forecasted performance improvements, thus affecting revenue realization from milestone payments.
  
• The revised capital expenditure plans and hesitance on share repurchases due to cash flow uncertainties suggest potential challenges in generating sufficient free cash flow, impacting future earnings and shareholder returns.

Valuation

• The analysts have a consensus price target of $231.51 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 $326.0, and the most bearish reporting a price target of just $180.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $13.1 billion, earnings will come to $777.3 million, and it would be trading on a PE ratio of 13.7x, assuming you use a discount rate of 6.6%.
• Given the current share price of $191.61, the analyst's price target of $231.51 is 17.2% 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.