Huntington Ingalls Industries Inc. (HII - Analyst Report) was awarded a $7.2 million contract modification to a previously awarded contract (N00024-06-C-2304) for research, development, test, and technical services in support of the DDG 1000 Zumwalt-class destroyer program.
DDG 1000 technical services include technology development, analytical modeling, qualification of materials, potential design/process improvements and design excursions.
Work on the contract will be performed in Pascagoula and Gulfport in Mississippi and is expected to be completed by September 2013. Naval Sea Systems Command, Washington, D.C., is the contracting activity.
Going forward, the tepid recovery in the U.S. economy raises fears of further cutbacks in future defense budgets. We expect the Euro-area crisis to continue to impact the financial markets. Slower growth implies a significantly higher unemployment rate. We now see greater downside risks for the U.S. economy in the near term, which may affect government spending on defense.
Finally, the apprehension over cutbacks is fueled by Defense Secretary Leon Panetta’s ambitious plans to save $487 billion over the next ten years. The heightened uncertainty may contribute to sharply lower equity prices and wider risk spreads. We feel this will invariably lead to slow consumer spending, and the general pull-back from risk may affect government spending on defense.
However, our bullishness for Huntington Ingalls remains unperturbed with the recently reported strong second quarter numbers. Sales rose to $1.72 billion from $1.56 billion in the year-ago quarter. The increase was attributed in part to higher sales of amphibious assault ships. In that quarter the company’s performance reflected the strong execution of existing contracts and a steady ramp toward higher margins. As a result, earnings per share rose to $1.00 from 80 cents in the year-ago period.
Huntington Ingalls was also proactive in booking new awards to cement its performance. The value of new contract awards won during the three-month period ended June 30, 2012, was approximately $2.5 billion. Significant new awards during the second quarter of 2012 included contracts for the detail design and construction of LHA-7 Tripoli, advance procurement for construction of LPD-27 and planning efforts for the CVN-72 USS Abraham Lincoln refueling complex overhaul. We currently have a long-term Outperform recommendation on the stock.
Presently, Huntington Ingalls holds a short-term Zacks #2 Rank (Hold), primarily due to the low-level of current valuation vis-à-vis peers like Lockheed Martin Corporation (LMT - Analyst Report) and Northrop Grumman Corporation (NOC - Analyst Report). Year-to-date the stock rose more than 29% and is now hovering near its 52-week high.
Huntington Ingalls Industries designs, builds and maintains nuclear and non-nuclear ships for the U.S. Navy and Coast Guard and provides after-market services for military ships around the globe. The company also develops and produces warships, including destroyers, amphibious transport dock ships, and national security cutters for the surface Navy fleet, U.S. Coast Guard, U.S. Marine Corps, and foreign and commercial customers. Additionally, the company provides complex nuclear project management; safe management and handling of radiological materials and waste; and nuclear facility construction, commissioning, operations, and D&D services.