Please ensure Javascript is enabled for purposes of website accessibility

Huntington Ingalls Scores a Direct Hit on Earnings

By Rich Smith - May 6, 2016 at 2:30PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Analysts' expectations got blown away for the best possible reasons. But what will Huntington do for an encore?

HII Price Chart

Huntington Ingalls reported earnings Thursday. Its stock jumped immediately. HII Price data by YCharts.

Investors went into earnings day Thursday expecting Huntington Ingalls (HII -3.75%) to report growth in both revenues and profits -- and it did. But even the most optimistic investors were probably surprised at just how well Huntington Ingalls performed last quarter.

And that's where we'll begin our story.

The news
On Thursday, Huntington Ingalls reported:

  • $1.76 billion in quarterly sales, up 12% year over year and 11% ahead of analyst predictions.
  • Operating profit margins of 11.2% -- up 120 basis points year-over-year.
  • Operating profits of $198 million (up 27%).
  • And on the bottom line, $2.87 in profits per diluted share -- a staggering 60% improvement over last year, and 35% ahead of Wall Street estimates.

Commenting on the quarter, CEO Mike Petters modestly observed that his company was continuing to "execute well," crediting a "strong operating performance at Ingalls Shipbuilding" for helping to boost results for the company at large.

How'd they do that?
What's perhaps most interesting about the huge earnings beat is that it does indeed appear to have come about entirely by dint of "strong operating performance." There were no one-time charges inflating comparisons to last year's Q1 to explain away, nor any large tax benefits recorded this time. The impressive earnings came quite simply from booking revenues, controlling costs, and dropping profit to the bottom line.

Now the question is whether Huntington Ingalls can keep up the good work?

Trouble in the water
In fact, that could prove difficult. Given how good Huntington's quarter was, it's hard to find facets to quibble with this week. But here are a few to chew on.

During the quarter, Huntington brought in only $1 billion in new orders for its shipbuilding businesses. And yes, $1 billion is an impressive sum, but it's considerably less than the $1.76 billion in revenues billed during the quarter. As a result, Huntington Ingalls' book-to-bill ratio was a discouraging 0.57 -- a number that if not quickly improved upon, points to lower revenues for the company in future quarters.

Another thing to keep in mind: As Petters pointed out, Ingalls Shipbuilding was the company's bright shining star in Q1, growing its operating profit margin 440 basis points year-over-year. Ingalls, which builds vessels such as destroyers, coast guard cutters, and amphibious assault craft, saw revenues surge 25%. And naturally, a big increase in very high-margin revenue was good news for Huntington Ingalls stock.

In contrast, the Newport News Shipbuilding division, which builds submarines and aircraft carriers for the Navy, did less well. Revenues at Newport News increased less than 9%, and profit margins actually declined by 110 basis points to 7.7%. And Newport News is still Huntington Ingalls' bigger business, producing more than twice the revenues that Ingalls brings in. Thus, its results weigh much more heavily on the company's overall performance.

Long story short, this is a good news/bad news situation: The first quarter was a great one for Huntington Ingalls as a whole. If the company plans to keep the gains flowing, though, it simply must improve profitability and grow revenues faster at Newport News. On the other hand, if Huntington Ingalls succeeds in raising the tempo of operations at its biggest division (Newport News) to that of its best division (Ingalls), then the outlook for Huntington Ingalls stock should be very bright indeed.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Huntington Ingalls Industries, Inc. Stock Quote
Huntington Ingalls Industries, Inc.
$201.14 (-3.75%) $-7.83

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/18/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.