MINYANVILLE ORIGINAL Huntington Ingalls Industries
(NYSE:HII) designs, builds, and maintains nuclear and non-nuclear ships for the US Navy and provides maintenance services for military ships around the globe. The company currently operates two businesses: Ingalls Shipyard, which builds warships for the US Navy, Coast Guard, and foreign customers, and Newport News Shipbuilding, which is the United States Navy’s sole builder and refueler of nuclear-powered aircraft carriers. It is also one of only two shipyards capable of building nuclear-powered submarines.
Huntington Ingalls Industries was spun off from Northrop Grumman
(NYSE:NOC) in March 2011, as it was believed that operating this highly specialized ship builder as an independent company would allow for greater management focus and shareholder value creation.
This company is an absolutely critical component of the US Navy’s supply and maintenance chain, and as such it is in a unique position. In a recent investor presentation
the company mentioned that it is the sole provider of products and services that that account for 70% of its revenue.
Consequently, the US Navy has a vested interest in seeing that this company is as stable as possible and able to focus on its essential shipbuilding and maintenance duties. The company should have substantial negotiating power to build healthy margins into its products and services over the coming years, and this should be doubly true under spending priorities set by a Romney administration.
The company is a bit of a turnaround story, and management is working to bring the company forward from a period of compressed operating margins and operating profits. The most recent quarterly report suggests they are making steady progress:
(Source: Huntington Ingalls Industries Q2 2012 presentation)
The company will be reporting Q3 results on Thursday, November 8, so this will give us another opportunity to assess its progress.
Regardless, the largest opportunity here will be if Mitt Romney wins the presidential election. Romney has made rebuilding the US Navy’s ship count and offensive capabilities a key priority of his National Defense strategy. Rather than the anticipated belt-tightening and budget cuts, US shipbuilding will be positioned to enter a new golden age. As the monopoly supplier of so many of the US Navy’s critical weapons systems, Huntington Ingalls Industries will be very well-positioned to capitalize on this trend.
It appears that the turnaround story at Huntington Ingalls industries is beginning to be factored into the company’s stock price. In the following chart you can see that it has regained the ground it lost after the spin-off, and is currently breaking out to all-time highs.
A Romney victory means buy this stock on small dips over the coming months and plan to hold for 3+ years. Continue to monitor turnaround progress.
Nat Stewart runs the trading-strategy website www.nastrading.com. The site’s mission: “Help traders capture explosive moves in the forex, futures, and stock markets.”
No positions in stocks mentioned.