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Huntington Ingalls (HII) Up 16.9% Since Last Earnings Report: Can It Continue?

Zacks Equity Research

It has been about a month since the last earnings report for Huntington Ingalls (HII). Shares have added about 16.9% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Huntington Ingalls due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Huntington Ingalls Q1 Earnings Miss Estimates, Up Y/Y

Huntington Ingalls Industries' first-quarter 2020 adjusted earnings of $2.43 per share missed the Zacks Consensus Estimate of $4.47 by 45.6%.

Total Revenues

Total revenues came in at $2.26 billion, exceeding the Zacks Consensus Estimate of $2.11 billion by 7.1%. The top line also rose 8.8% from $2.08 billion in the year-ago quarter. The increase was driven primarily by higher volumes at the Newport News and Ingalls shipbuilding divisions as well as growth in the Technical Solutions division.

Operational Performance

Huntington Ingalls’ total operating income grew 33.5% year over year to $215 million, while operating margin was 9.5% compared with 7.7% in the first quarter of 2019. The increases in both metrics mainly resulted from a more favorable operating FAS/CAS adjustment and higher risk retirement at both Newport News and Ingalls shipbuilding divisions.

Huntington Ingalls received orders worth $900 million during the first quarter. As a result, the company’s total backlog reached $45.2 billion as of Mar 31.

Segmental Performance

Newport News Shipbuilding: Revenues totaled $1,341 million at this segment, up 4.8% year over year, backed by higher revenues in submarine construction.

Meanwhile, operating income improved 17.3% to $95 million, while operating margin expanded 75 bps to 7.1%. These increases were primarily driven by higher risk retirement on the VCS program and the RCOH of USS George Washington (CVN 73).

Ingalls Shipbuilding: Revenues at this segment increased 7.7% to $629 million on account of higher revenues from the San Antonio-class LPD program and the Arleigh Burke-class DDG program.

Also, operating income surged 47.8% to $68 million, while operating margin expanded 293 bps to 10.8%. These increases were primarily driven by higher risk retirement on the LPD and DDG programs.

Technical Solutions: Revenues at this segment summed $317 million, up 32.1% year over year. The upside was primarily led by higher mission driven innovative solutions (MDIS) revenues attributable to the acquisition of Fulcrum IT Services in 2019 and higher volumes on other MDIS services. The segment incurred an operating loss of $7 million, while operating margin contracted 304 bps during the quarter.

Financial Update

Cash and cash equivalents as of Mar 31, 2020, were $28 million, significantly down from $75 million as of Dec 31, 2019.

Long-term debt, as of Mar 31, 2020, was $1,667 million compared with the 2019-end level of $1,286 million.

Cash from operating activities, at the end of the first quarter of 2020, grossed $68 million compared with $11 million at the end of first-quarter 2019.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted -16.44% due to these changes.

VGM Scores

At this time, Huntington Ingalls has a subpar Growth Score of D, however its Momentum Score is doing a lot better with an A. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Huntington Ingalls has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.



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