Aligning With National Security Strategy Spells Robust Growth For Defense Firm

Key Takeaways

• Strategic alignment with US National Security strategy ensures a dependable revenue stream, supporting long-term growth without using exact figures.
  
• Investments in operational efficiency and diverse high-tech sectors hint at future revenue and margin expansion, reflecting a strong financial outlook without citing specific financial data.
  
• Operational and financial challenges, such as labor productivity, contract delays, and dependence on defense appropriations, may impact Huntington Ingalls Industries' margins and revenue growth.

Catalysts

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

• The strategic alignment of Huntington Ingalls Industries' products and services with the United States National Security strategy suggests a continuous and predictable revenue stream, directly impacting the company's long-term revenue growth.
  
• Significant investments in capital and employee development, coupled with Navy industrial-based investments, are expected to enhance operational efficiency and shipyard capacity, which could lead to improved net margins by achieving financial commitments to shareholders.
  
• New contract awards totaling $3.1 billion and a strong backlog of $48.5 billion, of which $27 billion is currently funded, indicate a robust future workload that is likely to contribute to sustained revenue growth.
  
• The company's focus on expanding and diversifying its Mission Technologies business, evidenced by a record revenue and a substantial new business opportunity pipeline over $83 billion, hints at potential revenue expansion and margin growth in high-tech, competitive sectors.
  
• Bipartisan support for shipbuilding programs in the fiscal year 2025 defense appropriations and authorization bills, including funding for various ship classes and investments into the submarine industrial base, suggests a favorable future funding environment that could positively impact revenue and earnings growth through new contract opportunities.

Assumptions

• Analysts are assuming Huntington Ingalls Industries's revenue will grow by 3.4% annually over the next 3 years.
• Analysts are assuming Huntington Ingalls Industries's profit margins will remain the same at 6.4% over the next 3 years.
• Analysts expect earnings to reach $833.2 million (and earnings per share of $22.31) by about September 2027, up from $748.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.4x on those 2027 earnings, up from 14.1x today. This future PE is lower than the current PE for the US Aerospace & Defense industry at 32.8x.
• Analysts expect the number of shares outstanding to decline by 1.64% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.22%, as per the Simply Wall St company report.

Risks

• Concerns regarding labor productivity not yet returning to pre-pandemic levels could hinder operational efficiency and negatively impact margins across shipbuilding operations.
  
• Potential for delays in major contract awards, including Block VI Virginia-class submarines, may cause revenue forecasting uncertainties and impact future earnings.
  
• Shifts in delivery timelines for key projects due to workforce limitations or other disruptions could lead to lower than expected contract incentives, affecting shipbuilding margins.
  
• Increased capital expenditures aimed at improving shipyard infrastructure and labor proficiency may not yield immediate returns, potentially straining short-term cash flow and impacting free cash flow projections.
  
• The company's dependence on bipartisan support for defense appropriations and authorization bills introduces a risk to funding stability, which could impact planned shipbuilding programs and future revenue growth.

Valuation

• The analysts have a consensus price target of $288.86 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 $322.0, and the most bearish reporting a price target of just $221.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $13.0 billion, earnings will come to $833.2 million, and it would be trading on a PE ratio of 15.4x, assuming you use a discount rate of 6.2%.
• Given the current share price of $269.21, the analyst's price target of $288.86 is 6.8% 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.