Huntington Ingalls Industries, Inc. (HII): A Bull Case Theory
We came across a bullish thesis on Huntington Ingalls Industries, Inc. (HII) on Substack by Student of Value. In this article, we will summarize the bulls' thesis on HII. Huntington Ingalls Industries, Inc. (HII)'s share was trading at $187.54 as of April 8th. HII's trailing and forward P/E were 13.43 and 13.18 respectively according to Yahoo Finance.
Photo by Michael Afonso on Unsplash
Huntington Ingalls Industries (HII), the largest military shipbuilder in the U.S., has entered a pivotal phase following over a decade of evolution since its 2011 spin-off from Northrop Grumman. The company operates through three core segments—Newport News Shipbuilding, Ingalls Shipbuilding, and Mission Technologies—each playing a distinct role in the U.S. defense industrial base. Newport News, a critical national asset as the only producer of U.S. Navy aircraft carriers and one of just two nuclear submarine builders, remains the company's backbone, though it recently posted a 4% revenue decline due to labor shortages and cost overruns on the Virginia-class submarines. Ingalls Shipbuilding, known for its construction of surface combatants, remains operationally stable with six vessels underway but is facing declining demand in the amphibious category. The most dynamic segment is Mission Technologies, which has rapidly gained momentum since the 2021 acquisition of Alion Science. With a focus on cybersecurity, artificial intelligence, and defense systems, Mission Tech has grown 19% year-over-year, now contributing 25% of revenue and expected to reach 30% by 2027.
Despite this internal growth engine, HII's stock has suffered a 45% decline, largely driven by deteriorating margins on fixed-price contracts signed prior to the inflation surge, compounded by continued labor and supply chain headwinds. In Q4 2024, operating margins dropped sharply from 10.4% to 3.4%, raising investor concerns. Management, however, remains confident in a recovery, guiding toward 7.5–8% margins by 2026 through renegotiated Navy contracts and targeted workforce expansion. The company is concurrently executing a $4.1 billion shipyard modernization program aimed at reducing labor reliance and enhancing productivity through automation over the next decade.
Strategically, HII is well positioned within the Navy's long-term vision of a 355-ship fleet, even as short-term headwinds persist. Its $48 billion backlog, spanning 43 vessels, provides long-term revenue visibility, and flagship programs like the Columbia-class SSBN—totaling $120 billion—anchor its future pipeline. However, the FY2025 Navy budget has dampened short-term sentiment: only six new ships will be funded (versus the 10–11 required annually), while 19 are scheduled for decommissioning, shrinking the fleet to 287 ships. Compounding matters, the submarine industrial base remains constrained, unable to consistently deliver two Virginia-class submarines annually, averaging only ~1.3 since 2022. Fixes, including increased outsourcing, industrial subsidies, and new workforce initiatives, are expected by 2028.
A critical emerging trend is the Navy's shift toward unmanned underwater vehicles (UUVs), which are projected to comprise 30–50% of undersea operations by 2040. These drones excel in intelligence, surveillance, reconnaissance, mine clearance, and sabotage, often deployed from manned platforms like Virginia-class submarines. HII, with its unique dual exposure to both manned submarines and growing investments in unmanned technologies, stands to benefit from this evolving naval doctrine. While UUVs can't replace the strategic deterrence of SSBNs, they offer scalable and cost-effective solutions that align with shifting Pentagon priorities.
Financially, the company has delivered a 5.2% revenue CAGR over the past decade and returned substantial capital to shareholders, repurchasing 20% of its shares and delivering a 5–6% annualized combined return through dividends and buybacks. Yet, its 2021 acquisition of Alion for $1.65 billion in cash ballooned debt levels, leaving $2.7 billion outstanding—double its pre-deal debt. While still within acceptable ranges for a prime contractor, annual debt servicing of $150–$200 million amid rising interest rates is putting pressure on free cash flow. This pressure culminated in a recent 20% drop in stock price, following management's withdrawal of its five-year free cash flow guidance due to continued margin strain.
However, recovery remains plausible. Management forecasts capex peaking at 5% of revenue (~$600 million annually) through 2026, after which it will taper to 2–2.5%. If capex and debt service are reduced post-2026 and shipbuilding margins rebound to historical levels, free cash flow could reach $600 million, suggesting an FCF multiple of 11–17x at current prices. Valuation scenarios support this upside: assuming 4% annual revenue growth and margin normalization, discounted cash flow models yield a fair value of $287 per share, while conservative relative valuation estimates place it between $250–$260. Even with risk factors such as fixed-price contract exposure, skilled labor shortages, and shifting defense priorities, HII's restructuring efforts, strategic backlog, and exposure to both traditional and next-generation naval technologies offer a compelling long-term investment case with a favorable risk/reward profile.
Huntington Ingalls Industries, Inc. (HII) is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 27 hedge fund portfolios held HII at the end of the fourth quarter which was 20 in the previous quarter. While we acknowledge the risk and potential of HII as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than HII but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: 8 Best Wide Moat Stocks to Buy Now and 30 Most Important AI Stocks According to BlackRock.
Disclosure: None. This article was originally published at Insider Monkey.
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