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.