Huntington Ingalls Industries, Inc. – Market, Intrinsic & Value Investing Prices
“We will build great ships. At a profit if we can. At a loss if we must. But we will build great ships.” – Newport News Shipbuilding Mission Statement
The largest subsidiary of Huntington Ingalls Industries is their Newport News Shipbuilding division. They are the sole builder of the United States Navy’s aircraft carriers. Newport News Shipbuilding has been in business for over 140 years. Huntington Ingalls Industries has three distinct segments of operations. In addition to Newport News Shipbuilding, Huntington Ingalls Industries has its Ingalls division which builds non-nuclear combatant vessels including Coast Guard Cutters. A third division is their Technical Solutions segment which provides intelligence services to the Navy. With 44,000 employees and a backlog of $50 Billion of work, Huntington Ingalls Industries is an excellent inclusion in any value investing portfolio. With this site’s Value Investment Fund, this particular company is included in the Military Contractor’s Pool of investments.
The current market price as of November 20, 2021 is around $185 share. With 40.6 Million shares in the market, its market value is around $7.5 Billion. Therefore, this company is considered a mid-cap investment. However, the company consistently generates increasing amounts of revenue and outstanding profits. For investors, it also pays excellent dividends that often exceed a 2.5% dividend yield. The risk associated with a deep decline with the stock’s price is practically non-existent and more importantly, even if one occurred, the likelihood it will stay depressed for more than two years is remote. Even though this company falls within the mid-capitalization group of investments, it behaves like a large-cap. Simply stated, if a value investor can snap up shares at a good price, odds are, the investment will provide superior returns when the stock’s price returns to a favorable market price. The questions are now: ‘What is Huntington Ingalls Industries, Inc.’s intrinsic value, value investing buy price and the market recovery price for the purpose of value investing?’.
Huntington Ingalls Industries – Intrinsic Value
There is no universal formula to determine intrinsic value. There are about six commonly accepted methods (formulas) and each is highly dependent on certain conditions existing to have a high level of confidence with the result. The larger the company, the greater the confidence with certain intrinsic value methods over others. Thus, a value investor seeks out distinct conditions that provide greater credence to one intrinsic value formula over another. The key to determining intrinsic value for Huntington Ingalls is to focus on its core customer, the United States Navy. Newport News Shipbuilding, Huntington Ingalls Industries’ largest subsidiary, has been building aircraft carriers for the Navy since 1930. There has never been a lapse of any duration without a carrier under construction. In effect, this continuous demand for ships makes Huntington Ingalls recession proof. Any kind of consumer impact on the economy has no or very little effect on the long-term contracts related to vessel construction. In addition, these contracts have inflation adjustment clauses along with material shortage impact clauses. Basically, it is easier to forecast revenues and profits with military contractors than consumer oriented operations. Take a look at the last 13 years of revenues and profits for Huntington Ingalls Industries (2021 is estimated based on actual information from the first three quarters as reported).
This graph depicts the relationship between revenues and profits. Basically, the last six years has seen a step-up in profitability that consistently exceeds $500 Million per year. Thus, with 40.6 Million shares, each share is earning at least $12 per share. The recent six years has also seen a shifting to a higher level of revenue. The primary driver of this elevated level of sales is due to full operations of the third segment, Technical Solutions, of Huntington Ingalls Industries. Therefore, it is reasonable, and with a high level of confidence, to predict that overall sales will exceed $8.7 Billion per year for the foreseeable future. Thus, it is also reasonable to expect no less than $500 Million in net earnings each year for several years to come.
When setting intrinsic value, one of the goals of a value investor is set a reasonable range of value to act as a guideline with actual outcomes from the various intrinsic value formulas. Using a simple price to earnings relationship of 13 to 1, Huntington Ingalls is worth at least $155 per share, at 16:1, the price exceeds $192 per share. Thus, it is fair to say that the intrinsic value will fall somewhere between $220 (18:1) on the high end and $140 (12:1) per share at the other end. Those methods that can produce a result within this range are more reliable than outcomes outside of this range when determining intrinsic value.