Market Might Still Lack Some Conviction On Huntington Ingalls Industries, Inc. (NYSE:HII) Even After 28% Share Price Boost

Huntington Ingalls Industries, Inc. (NYSE:HII) shares have had a really impressive month, gaining 28% after a shaky period beforehand. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 29% in the last twelve months.

Even after such a large jump in price, given about half the companies in the United States have price-to-earnings ratios (or "P/E's") above 18x, you may still consider Huntington Ingalls Industries as an attractive investment with its 14.8x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Huntington Ingalls Industries hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

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Does Growth Match The Low P/E?

There's an inherent assumption that a company should underperform the market for P/E ratios like Huntington Ingalls Industries' to be considered reasonable.

Retrospectively, the last year delivered a frustrating 18% decrease to the company's bottom line. Unfortunately, that's brought it right back to where it started three years ago with EPS growth being virtually non-existent overall during that time. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Shifting to the future, estimates from the eleven analysts covering the company suggest earnings should grow by 10% each year over the next three years. With the market predicted to deliver 11% growth per year, the company is positioned for a comparable earnings result.

With this information, we find it odd that Huntington Ingalls Industries is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting lower selling prices.

What We Can Learn From Huntington Ingalls Industries' P/E?

Huntington Ingalls Industries' stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Huntington Ingalls Industries currently trades on a lower than expected P/E since its forecast growth is in line with the wider market. There could be some unobserved threats to earnings preventing the P/E ratio from matching the outlook. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

It is also worth noting that we have found 2 warning signs for Huntington Ingalls Industries (1 shouldn't be ignored!) that you need to take into consideration.

If these risks are making you reconsider your opinion on Huntington Ingalls Industries, explore our interactive list of high quality stocks to get an idea of what else is out there.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.