The U.S. shipbuilding industry has been in a lull since the height of the pandemic, with companies tied to pre-COVID contracts that are not nearly as profitable now.
But the budget winds in Washington appear to be shifting, and Huntington Ingalls Industries (HII -1.06%) is likely to be one of the primary beneficiaries if they do. Shares of Huntington Ingalls traded up 12.9% in April, according to data provided by S&P Global Market Intelligence, as investors begin to climb on board for what they believe will be a profitable voyage.
Huntington Ingalls has long been considered one of the most vulnerable among the largest defense contractors. The company is one of the two primary shipbuilders for the U.S. Navy, but unlike its vertically integrated peers, Huntington relies on ships for nearly all its revenue.
The company's shares took a plunge in February after missing earnings expectations. But investors have been slowly warming to the shares as the Washington budget process heats up.
In early April, Navy Secretary John Phelan said domestic shipyards and shipbuilding are "a big, big priority for the president," and the Navy upped its long-term goal for fleet size. Late in the month, Huntington Ingalls and General Dynamics were awarded massive contracts to construct Virginia-class submarines, reinforcing the boats as a top U.S. government priority.
The good news continued into the first day of May, with Huntington Ingalls announcing first-quarter results that topped analyst expectations thanks to shipbuilding margins that came in 90 basis points ahead of expectations. The company also reiterated full-year guidance, though second-quarter projections are a bit below what analysts had expected.
Huntington Ingalls appears to have wind in its "sales" for the first time in years, and investors have every reason to be excited about the prospects. Trading at just 16 times earnings, Huntington Ingalls has the potential to make up ground in the quarters to come against other defense primes like General Dynamics (18.9 times earnings) and Lockheed Martin (20.7 times earnings).
But as the saying goes, it takes time to turn a battleship. Investors buying in now need to be aware that these contracts can take years to play out, and funding trickles in as milestones are met. Even if the company does even better than expected when the new budget is finalized, some of those funds will only reach Huntington Ingalls' bottom line toward the end of the decade.
The journey is long, but Huntington Ingalls is heading in the right direction.
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