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Huntington Gets DDG 51 Navy Contract

Zacks Equity Research

Ingalls Shipbuilding unit of Huntington Ingalls Industries (HII) has received a fixed-price incentive 10-year sizeable contract worth $3.33 billion from the U.S. Navy for the construction of five Arleigh Burke-class destroyers (DDG 51s). The contract also carries an option for engineering change proposals, design budgeting requirements and post-delivery availabilities of these ships. If the option is implemented, the value of the contract would go up to $3.39 billion.

A DDG ship is 509 feet long with a 66-foot beam. With a weight of 9,300 tons, the ship takes three and a half years to be built. DDG class ships provide multi-mission offensive and defensive capabilities. They have the capability to operate independently and also as a part of carrier strike groups, surface action groups, amphibious ready groups and underway replenishment groups. Moreover, they can fight air, surface and subsurface battles at the same time.

With this contract, the company succeeded in beating General Dynamics Corporation (GD) that received a separate $2.84 billion contract from the U.S Navy for the construction of four DDG 51s.

The largest military shipbuilder in the U.S., Huntington Ingalls is the prime industrial employer in Va. Huntington Ingalls is a spun-off unit of Northrop Grumman Corporation (NOC). In March this year, Huntington Ingalls received a Navy contract to perform refueling and complex overhaul, or RCOH operation, on a 25-year-old nuclear-powered Nimitz-class aircraft carrier − USS Abraham Lincoln. The price of the contract is valued at $2.6 billion. Per the agreement, Huntington Ingalls is entitled to refuel the ship's reactors and modernize over 2,300 compartments, 600 tanks along with various systems.

Last month, the company reported first quarter results with an operating margin of 6.1% versus 5.1% in the year-ago quarter. Revenues were, however, approximately flat year over year. Going forward, the company expects that its ongoing cost cut initiatives would help in improving margins further. The company expects the current contract to help the company in boosting its margin to a range of 9% to 10% by 2015 compared to 5.3% in 2012.

Despite the positives we remain concerned about defense cutbacks on high-cost platform programs and over-exposure to the Department of Defense budget. The company presently retains a short-term Zacks Rank #3 (Hold).

In the near term, we would advise investors to accumulate its short-term Zacks Rank #1 (Strong Buy) peer Erickson Air-Crane Inc. (EAC).

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