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Huntington Ingalls Industries Inc HII

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Capital Allocation

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Huntington Ingalls Announces Intent to Acquire Alion; Maintaining $201 Fair Value Estimate

Burkett Huey, CFA Equity Analyst

Analyst Note

| Burkett Huey, CFA |

On July 6, narrow-moat rated Huntington Ingalls Industries announced an intent to acquire Alion Science and Technology, a military services provider for $1.65 billion, which implies an enterprise value that is 1.0 times 2022 sales and 12.2 times adjusted EBITDA. These multiples are not grotesque for government services providers--Northrop Grumman sold its services business for about 1.5 times forward sales in late 2020, but government services providers range greatly in quality. This transaction will bring the firm from roughly seven eighths shipbuilder, one eighth services provider to about three quarters shipbuilder, one quarter services provider. We’re maintaining our $201 per share fair value estimate for the firm, as we think the price is right, but we think the firm is diluting its moat by adding a business that is subject to frequent recompetes to a shipbuilding portfolio that is resistant to recompetes. We are also widening the spread between our bull case and our bear case to reflect greater uncertainty, but we leave our uncertainty rating at medium.

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Company Profile

Business Description

Huntington Ingalls Industries was created from the spin-off of Northrop Grumman’s shipbuilding business. The company is the largest independent military shipbuilder. The company has three segments, two of which are shipyards. Ingalls produces non-nuclear-powered ships, particularly the America-class amphibious assault ship and the Arleigh Burke-class destroyer. The Newport News segment produces nuclear-powered ships, is the sole-source contractor for the Gerald R. Ford-class aircraft carrier, and is a major subcontractor to the Columbia-class attack submarine. The company’s technical solutions segment produces uncrewed undersea vehicles as well as provides various IT services for the government.

Contact
4101 Washington Avenue
Newport News, VA, 23607
T +1 757 380-2000
Sector Industrials
Industry Aerospace & Defense
Most Recent Earnings Mar 31, 2021
Fiscal Year End Dec 31, 2021
Stock Type Cyclical
Employees 42,000

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