Huntington Ingalls Earnings: Submarine Revenue and Margins Will Resurface

Key Morningstar Metrics for Huntington Ingalls Industries

• Fair Value Estimate: $312.00
• Morningstar Rating: ★★★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

What We Thought of Huntington Ingalls Industries’ Earnings

Huntington Ingalls Industries HII closed out a disappointing 2024 with flat sales of $11.5 billion and operating income dropping 32% to $573 million for the year. Submarine construction costs and productivity troubles depressed results, and the company is negotiating improved contract terms with the Navy in 2025.

Why it matters: A combination of cost growth, post-pandemic supply chain ripples, and trouble attracting seasoned shipbuilders for competitive pay all contributed to margins declining in Huntington Ingalls’ Newport News shipyard from 7.6% before covid-19 to 4.1% in 2024.

• While we generally see the company’s very long product cycles and long-term visibility into revenue as a plus, Huntington Ingalls is performing most of its submarine work according to fixed-price contracts negotiated with the Navy before covid scrambled its supply chain and inflated costs.
• The Navy has increased its budget for building submarines to reflect the new reality, including the need to pay more competitive wages to attract and retain shipbuilders. What remains is to translate the new amounts into specific contracts to build the next dozen or more submarines.

The bottom line: Our thesis remains intact for Huntington Ingalls, and we have reduced our fair value estimate to $312 per share to reflect minor adjustments to 2025’s operating margin forecast. The shares trade for nearly half that amount, and we see them as meaningfully undervalued.

• Investors who clamored for the company to attain operating margins above 9% at Newport News seem to have given up, sending the stock’s price down sharply after each of the last several earnings reports.
• Our fair value estimate includes forecast Newport News margins of 7.5% in the medium term, up modestly from the 5.5%-6.5% shipbuilding margin the company expects in 2025 and well within recent precedent. Thus we don’t think heroic assumptions are necessary to see value in the shares.