In a weak week for the Dow, shares of America's second-biggest warship-builder, Huntington Ingalls (HII +0.50%), largely dodged the downturn. Indeed, Huntington Ingalls shares ended the week up 1.2%, despite investors' muted enthusiasm for Q2 earnings results Wednesday.
Want to know why? So do I -- so let's dig a little bit into the results. In Q2 2013, Huntington Ingalls saw:
- Sales sink 2% to $1.68 billion ...
- But operating profit margins expand by 70 basis points, to 6.9% ...
- While profits per diluted share grew 12% to hit $1.12 per share -- and would have hit $1.36 per share but for necessary pension fund contributions.
So far, this is all pretty good news. Now watch how it gets better: CEO Mike Petters says Huntington Ingalls has a long-term goal to "strengthen our backlog" and achieve a "9-plus percent operating margin" by 2015. The prospect of greater backlog leading to greater revenues, and of these revenues being compounded by 30% increase in operating profit margins (from today's 6.9% margin) has to grab investors' attention. But is it doable?
In a word, yes. In Q2, Huntington won some $5.3 billion in new work from the Pentagon -- more than three times (in dollar value) as many new projects as it billed for old projects now completed. Huntington landed contracts to build five new DDG-51 Arleigh Burke-class guided missile destroyers, and a new National Security Cutter -- the Munro (NSC-6) to boot. It also won a $745 million contract to decommission and disassemble the nuclear aircraft carrier USS Enterprise (CVN 65).
USS Enterprise at sea, Source: Wikimedia Commons.
To put this in context, Huntington Ingalls won new contracts to guarantee nine months' worth of work, and won them all in a single quarter. Combine this accelerating rate of revenue growth with Petters' promise of fatter profit margins thereon, and you can see why analysts predict that Huntington Ingalls will be able to grow its profits at the rate of 21% annually over the next five years. (And to put that in context, 21% profits growth is more than three times faster than shipbuilding rivals Lockheed Martin (LMT 1.15%) or General Dynamics (GD 0.35%) are expected to grow).
Despite its superior performance, Huntington Ingalls commands a forward P/E ratio of only 12.4 -- right in line with the 12 forward P/E at General Dynamics, and the 13 forward P/E at Lockheed Martin. If you ask me, though, I think superior performance deserves a superior P/E. I think Huntington Ingalls stock deserves to go higher.
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