Huntington Ingalls Earnings: Steady Improvements In Postpandemic Operations Bode Well; Fair Value Estimate $285

Huntington Ingalls HII turned in third-quarter results largely in line with our expectations, and revised its expectations for the rest of 2023 slightly upward, meeting our previous forecast. We have revised our fair value estimate up to $285 from $283 to reflect the time value of the cash flows the company is accruing.

To meet those revised forecasts, the company will have to reach a few big milestones before 2023 is out, specifically delivering the Virginia-class submarine New Jersey to the U.S. Navy, floating the Virginia sub Massachusetts for final testing, and delivering the San Antonio-class amphibious transport dock Richard J. McCool to the U.S. Navy. Company management said that delivery will be a race to the finish line; if it spills over into January 2024, the firm won’t be able to recognize its milestone revenue or book commensurate profit in 2023. We would see this as unimportant, as it is just a shift in time and we expect HII’s long-cycle shipbuilding revenue to be lumpy at times.

The company reported significant progress in hiring to staff up its shipyards for full production volumes, which were seriously affected during the pandemic. As it completes boats that were in assembly during the pandemic and begins work afresh on new boats, we expect the company to be able to book incrementally higher margins than it has recently. We have forecast operating margins for the company inching upward to 7.5% in the medium term, up from 5.3% in 2022.