Breaking from the pack of most other defense contractors (and in a bad way), military shipbuilder Huntington Ingalls (HII 0.31%) reported weak earnings last week, sending its shares down more than 6% in a day. Since those earnings came out, however, Huntington has recovered more than half the ground it lost. At its last reported price of $196.47, the stock is down only 2.3% from its pre-earnings price.
So which investors are right? Those who sold the stock last week, or those who rushed in to snap up "cheap" Huntington Ingalls stock this week? Let's find out.
Earnings disappoint. Dive! Dive!
On Thursday last week, Huntington reported that:
- Sales declined 2% year over year to $1.7 billion.
- Operating profit margins plummeted 170 basis points to 9.5%.
- Profit declined 11% on the bottom line -- $2.56 per diluted share.
So far, so bad. And the news gets worse the deeper you read into the results. For example, Huntington Ingalls' Ingalls Shipbuilding unit -- which builds destroyers and amphibious assault ships for the Navy -- is Huntington's most valuable business. In last year's first quarter, it produced nearly twice as much operating profit per revenue dollar as did Huntington's larger Newport News division. In Q1 2017, however, Ingalls' revenues declined 6%, and its operating profit margin contracted by 200 basis points, to 12%. In contrast, the larger-but-less-profitable Newport News division (responsible for building nuclear submarines and aircraft carriers) suffered only a 2% revenue decline, and only an 80-basis-point decline in profit margin to 7.4%.
In other words, Huntington's more profitable division was harder hit than its less profitable division, resulting in an outsize hit to overall profits for the company as a whole.
Meanwhile, Huntington's tiny technical-solutions business, responsible for special projects such as Huntington's new drone submarine, had the worst news of all. Although revenue grew 8%, technical solutions lost money on every dollar it booked, and turned entirely unprofitable in Q1 -- a real shame, considering that this division had finally begun booking profits just last year.
Adding to the gloom, Huntington noted that it won only $600 million in new business during the quarter. That wasn't nearly enough to replace all the revenue Huntington booked in the quarter. Relative to the $1.72 billion in revenue collected, that gave Huntington Ingalls a downright abysmal book-to-bill ratio of about 0.35.
Grasping at straws
Not all of Huntington Ingalls' news was bad. Casting about for something -- anything -- good to say about last week's report, I lit upon the fact that the company generated positive free cash flow of $40 million last quarter. That was twice the cash profit Huntington managed to generate in Q1 of last year.
Granted, that's still less than 10% of the $423 million in free cash flow that Wall Street hopes Huntington Ingalls can produce this year -- and it took the company 25% of the year to come up with it. But at least it's a start, and a better start than Huntington made of things last year. And last year actually worked out pretty well for Huntington Ingalls, with the company eventually generating $537 million in cash profit when all was said and done.
So, as bad a start as Huntington Ingalls seems to be making of 2017, there's still a chance 2017 will turn out well in the end. This year is still young.