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Huntington Ingalls (HII) Down 2.8% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research

A month has gone by since the last earnings report for Huntington Ingalls (HII). Shares have lost about 2.8% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Huntington Ingalls due for a breakout? 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 catalysts.

Huntington Ingalls Q2 Earnings Miss, Revenues Up Y/Y

Huntington Ingalls Industries’ second-quarter 2019 earnings of $3.07 per share missed the Zacks Consensus Estimate of $3.56 by 13.8%. The bottom line also decreased 43.1% from $5.40 registered in the prior-year quarter.

The year-over-year decline in earnings can be attributed to lower operating income, an unfavorable change in the non-operating retirement benefit and a higher effective income tax rate compared with the prior-year quarter.

Total Revenues

Total revenues came in at $2.19 billion, outpacing the Zacks Consensus Estimate of $2.12 billion by 3.1%. The top line also rose 8.3% from $2.02 billion registered in the year-ago quarter. Higher volume at the Newport News Shipbuilding division and growth at the Technical Solutions division on account of recent acquisitions led to the upside.

Segment Details

Newport News Shipbuilding: Revenues totaled $1,267 million at this segment, up 7.1% year over year backed by higher revenues from aircraft carriers and naval nuclear support services.

Meanwhile, operating income declined 23.1% to $70 million on account of poor performance made by the VCS program.

Ingalls Shipbuilding: Revenues at this segment slipped 1.1% to $622 million on account of lower revenues from the Legend-class National Security Cutter (NSC) program and amphibious assault ships.

Also, operating income declined 16.9% to $69 million primarily due to lower risk retirement on the LPD program as well as recoveries related to a settlement agreement in 2018.

Technical Solutions: Revenues at this segment summed $336 million, up 38.3% year over year. The upside was supported by higher mission-driven innovative solutions revenues following the acquisitions of G2 and Fulcrum IT Services. Moreover, higher oil and gas, fleet support and nuclear and environmental revenues contributed to this unit’s revenue growth.

This segment incurred an operating loss of $1 million against operating income of $7 million in the year-ago quarter.

Backlog

Huntington Ingalls received new orders worth $900 million in the second quarter. As a result, the company’s total backlog reached $39.4 billion as of Jun 30, 2019, compared with $41 billion as of Mar 31, 2019.

Financial Update

Cash and cash equivalents as of Jun 30, 2019, were $29 million, significantly down from $240 million as of Dec 31, 2018.

Long-term debt, as of Jun 30, 2019, was $1,698 million compared with the 2018-end level of $1,283 million.

Cash outflow from operating activities, at the end of the second quarter 2019, grossed $33 million against cash inflow of $359 million at the end of second-quarter 2018.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision. The consensus estimate has shifted -6.72% 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 bit better with a C. However, the stock was allocated a grade of A on the value side, putting it in the top quintile 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. Notably, Huntington Ingalls has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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