Huntington Ingalls Has A Leadership Position In Defense, Buckingham Says In Bullish Initiation

Shipbuilder Huntington Ingalls Industries Inc HII is a pure play on the defense sector and boasts an "underappreciated story" that investors should take advantage of, according to Buckingham Research Group.

The Analyst

Analyst Richard Safran initiated coverage of Huntington Ingalls Industries with a Buy rating and $297 price target.

The Thesis

Huntington Ingalls is the largest shipbuilder for the American armed forces and is part of a duopoly with General Dynamics Marine, while Lockheed Martin Corporation LMT is a new competitor, Safran said in the initiation note. (See his track record here.)

Huntington Ingalls stands out among its defense peers, as it boasts a small number of very large contracts with the U.S. Navy and Coast Guard as opposed to a mix of large and small programs at other companies, the analyst said.

The company's leadership position makes it a prime candidate to benefit from heightened global tensions, and the Trump administration appears to be focused on building a bigger and better Navy force, Safran said.

The administration has approved an increase in total Navy ships from its 277 ships to 355, which implies a long-term pathway toward upside versus expectations for Huntington, according to Buckingham.

The company's "well-regarded" management team is doing a great job running the business, highlighted by the following, Safran said:

A 28-percent return on investment cash.
A net debt/EBITDA ratio of less than 1.
Cash flows backed by government spending.
A commitment toward investing in the business.

A commitment toward growing the dividend by more than 10 percent year-over-year while simultaneously buying back stock.

At current levels, Huntington Ingalls stock is trading at an "unwarranted" two-turns discount to its defense peers at 15 times consensus 2019 estimated FCF/share, despite a superior 7-percent free cash flow yield, according to Buckingham.