Huntington ingalls industries stock pullback creates a buying opportunity – huntington ingalls industries, inc. (nyse hii) seeking alpha electricity and magnetism review game


“I wouldn’t trade this position for anything. We’re not having execution problems. We need to go get these ships under contract. They need to be good contracts and they’re going to serve us well for the next five to 10 years. And so that’s why I find this to be the most exciting – frankly, this is the most exciting shipbuilding environment in over 30 years.

And so where the margins go, I guess my thinking on that is that there’s two major mistakes you can make in shipbuilding; the first one is you can recognize income before you retire the risk; and when you have to back that out, because you didn’t retire the risk, that’s not a small matter that’s a huge matter. And I’ve lived through a couple of those. We will not do that here at HII.”

The Navy plans to procure 54 ships during the 2019 – 2023 time frame. Some of the planned procurements include ships that HII can compete for and win. These include a fourth Gerald R. Ford class carrier – HII is sole source, the first Columbia class ballistic missile nuclear submarine, which HII builds with General Dynamics (NYSE: GD) Electric Boat, 14 DDG Destroyers, which HII competes against GD Bath Iron Works, and three LXR next generation amphibious warfare ships.

HII has been selected to be sole source for the lead ship LXR, which is now designated as LPD Flight ll. The initial Flight ll ship is LPD 29, carrying on the LPD numeric. While none are yet under contract, this is a program to build 13 new amphibious ships. Initial procurement will be in 2018. HII/Ingalls built Flight l.

The 30 year shipbuilding plan published by the Navy includes twelve new carriers to replace current carriers as they end their 50 year life. Three have currently been ordered in the new Gerald F. Ford class (Ford, Kennedy and Enterprise). The Ford has been commissioned and delivered to the Navy. The Kennedy and Enterprise are in progress at HII Newport News.

The Navy has typically procured one aircraft carrier at a time. This may be separated by up to five year intervals. As such the planning horizon for HII, and its suppliers, is uncertain with regard to resources, materials, facilities, etc. The Naval Sea Systems Command, led by Vice Admiral Tom Moore is now considering procuring the next two carriers in one buy (CVN 80/81). This can allow the construction sequence on shorter centers (e.g. four year centers). The big benefit for HII is to provide stability in design and construction, optimize and reduce manpower, buy materials for two ships and optimize facility usage. Material can be 40% of the carrier cost so procuring for multiple ships provides savings.

“The Newport News team is also preparing for the future as they recently submitted their proposal in response to the Navy’s request to provide pricing to purchase CVN 80 and CVN 81 under a two ship contract. The two ship purchase reduces the cost of aircraft carriers by stabilizing the Newport News workforce in the national supplier base, allowing the team to buy materials in quality, and sequencing construction activities more efficiently.”

HII is highly dependent upon the Department of Defense and the Navy. The Navy shipbuilding budget is projected to remain high under the current government administration. As noted above Mike Petters has said that “… this is the most exciting shipbuilding environment in over 30 years.” As long as HII continues to deliver on the backlog, revenue and earnings should remain admirable. Due to startups and the delivery cycle, cash may not always be linear, it could be “lumpy”. But future cash generation is in the cards with the projected Navy shipbuilding plans to eventually reach 355 ships from the 285 of today.

The 1Q 2019 net income increase of 13.7% (albeit missing the Analyst estimate but explained by Mike Petters) and his remarks are positive for current and future shareholders. The pullback results in a P/E of 19. Compare that to Lockheed Martin Corporation (NYSE: LMT) at 46; Raytheon Company (NYSE: RTN) at 30 and General Dynamics at 21. HII is not of the same annual revenue as these defense companies but with the current focus on increasing the Navy platforms it deserves careful consideration in a national defense portfolio.