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Huntington Ingalls Wins $13M Deal to Modernize Warships

Zacks Equity Research

Military shipbuilder Huntington Ingalls Industries Inc. HII won a modification contract worth $12.8 million, to provide yard services for CG-47-class cruisers and DD 963-class destroyers to the U.S. Navy. Work related to the deal is scheduled to be over by September 2018.

Details of the Deal

Per the terms of the deal, the company will provide long lead-time material procurement and management services for lifetime for both maintenance and modernization of these ships. The services include necessary engineering, technical, planning, ship configuration, data as well as logistics efforts.

The contract was awarded by the Shipbuilding, Conversion, and Repair, Gulf Coast, Pascagoula, MS; and will utilize fiscal 2017 operations and maintenance (Navy) funds to complete the task at Pascagoula, MS.

A Brief Note on CG-47 & DD 963

USS Ticonderoga (CG 47) is an Aegis guided missile cruiser, jointly constructed by Huntington Ingalls and General Dynamics Corp. GD. Raytheon Company’s RTN Tomahawk missiles were deployed in these warships. These ships are equipped with Aegis Combat System which integrates the cruiser’s electronic sensors and weapons systems to engage anti-ship missile threats. 

Notably, Lockheed Martin Corporation’s LMT AEGIS or Advanced Electronic Guidance and Instrumentation System is an integrated missile-guidance system, used by the U.S. Navy and allied ships to protect the battle group.

On the other hand, built by Huntington Ingalls, DD 963 Spruance-class destroyers were developed for the primary mission of anti-submarine warfare, including operations as an integral part of attack carrier forces. It is designed to hunt down and destroy high speed submarines in all weather, but can also engage ships, aircraft, and shore targets. These multi-purpose combatants are also capable of providing naval gunfire support in conjunction with Marine amphibious operations worldwide.

Our View

The Department of the Navy (DON) proposed its base budget of $171.5 billion this May, for fiscal year 2018. Striving to restore Navy readiness through this budget, the DON requested $54.6 billion for operations and maintenance, funding 100% of projected ship depot maintenance. Surely this scrumptious budget boosted the prospects of Huntington Ingalls, which is one of the two primary military shipbuilders in the United States.

Further, majority of the new eight ships allotted for purchase by the Navy in fiscal 2018, will come from either Huntington Ingalls or General Dynamics. This provided further impetus to the stock, as a result of which, the company has witnessed an 8% rise in its share price, since the budget was proposed.

Although this budget proposal has not yet been approved by the U.S. Senate, we believe the recently won contract is indicative of the fact that the U.S. Navy remains firm with its focus toward modernizing its existing fleet of warships. If the budget proposal gets eventually approved, we can expect to witness more such contracts for Huntington Ingalls, in the coming days. This will surely boost the company’s profit level, which in turn is most likely to get reflected in increased earnings for shareholders.

Price Performance

Shares of Huntington have rallied 29% in a year, underperforming the industry’s 40.3% gain. This could be because of the earlier budget cuts which have put pressure on the top line. Also, investors remain concerned about budget deficits and political uncertainty that may make future defense budgets vulnerable to cutbacks.

Zacks Rank

Huntington currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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