Huntington Ingalls Industries Inc (NYSE:HII) shareholders, and potential investors, need to understand how much cash the business makes from its core operational activities, as well as how much is invested back into the business. After investment, what’s left over is what belongs to you, the investor. This also determines how much the stock is worth. I will take you through Huntington Ingalls Industries’s cash flow health and the risk-return concept based on the stock’s cash flow yield, using the most recent financial data. This will help you think about the company from a cash perspective, which is a crucial factor to investing.
Is Huntington Ingalls Industries generating enough cash?
Free cash flow (FCF) is the amount of cash Huntington Ingalls Industries has left after it pays off its expenses, including its net capital expenditures, which is what the company needs to spend each year to maintain or grow its business operations.
The two ways to assess whether Huntington Ingalls Industries’s FCF is sufficient, is to compare the FCF yield to the market index yield, as well as determine whether the top-line operating cash flows will continue to grow.
Free Cash Flow = Operating Cash Flows – Net Capital Expenditure
Free Cash Flow Yield = Free Cash Flow / Enterprise Value
where Enterprise Value = Market Capitalisation + Net Debt
Huntington Ingalls Industries’s yield of 2.75% indicates its sub-standard capacity to generate cash, compared to the stock market index as a whole, accounting for the size differential. This means investors are taking on more concentrated risk on Huntington Ingalls Industries but are not being adequately rewarded for doing so.
Is Huntington Ingalls Industries’s yield sustainable?Does Huntington Ingalls Industries’s future look brighter in terms of its ability to generate higher operating cash flows? This can be estimated by examining the trend of the company’s operating cash flow moving forward. In the next couple of years, Huntington Ingalls Industries’s operating cash flows is expected to grow by a double-digit 12%, which is encouraging, should capital expenditure levels maintain at an appropriate level. Below is a table of Huntington Ingalls Industries’s operating cash flow in the past year, as well as the anticipated level going forward.
|Current||+1 year||+2 year||+3 year|
|Operating Cash Flow (OCF)||US$889m||US$966m||US$1.1b||US$995m|
|OCF Growth Year-On-Year||8.7%||13%||-9.1%|
|OCF Growth From Current Year||23%||12%|
Given a low free cash flow yield, on the basis of cash, Huntington Ingalls Industries becomes a less appealing investment. This is because you would be better compensated in terms of cash yield, by investing in the market index, as well as take on lower diversification risk. Keep in mind that cash is only one aspect of investment analysis and there are other important fundamentals to assess. I suggest you continue to research Huntington Ingalls Industries to get a more holistic view of the company by looking at:
- Valuation: What is HII worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether HII is currently mispriced by the market.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Huntington Ingalls Industries’s board and the CEO’s back ground.
- Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.