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Coverage Initiation: Huntington Ingalls
Value Line has initiated coverage of Huntington Ingalls Industries (HII). The company designs, manufactures, and maintains nuclear and non-nuclear ships, primarily for the United States Navy and Coast Guard. Formerly known as Northrop Grumman Shipbuilding, it was created in early 2008 by the merger of Northrop Grumman’s (NOC) two shipbuilding divisions, Ship Systems and Newport News.
On March 31, 2011, in a tax-free transaction to its shareholders, major defense contractor Northrop Grumman spunoff Huntington Ingalls. Stockholders received one Huntington share for every six shares of Northrop owned. No fractional shares of Huntington were distributed; fractional shares were aggregated and sold on the open market, and the proceeds were dispersed in the form of cash payments to Northrop shareholders who would have been entitled to fractional shares. After the distribution, Huntington began trading on the New York Stock Exchange under the ticker HII. The company is based in New Port News, Virginia and has more than 38,000 employees across Virginia, Mississippi, Louisiana, and California.
Huntington’s operations are divided into two segments: Ingalls Shipbuilding is a major supplier to the U.S. Navy and commercial maritime industry, providing naval architecture and engineering services, systems assessments, maintenance, and logistical services. Newport News Shipbuilding is the only domestic designer and manufacturer of aircraft carriers. In addition, it is one of just two companies that produce submarines for the U.S. Navy (General Dynamics (GD) is the other manufacturer). The company also builds destroyers, which are fast, maneuverable, and long-distance warships whose main function is to protect larger vessels from smaller attackers. Huntington’s ships are sold to the Navy, Marines, Coast Guard, and foreign militaries.
The company derives almost all of its revenues and profits from the United States government, which can be beneficial or hazardous. On the bright side, annually, the United States spends hundreds-of-billions of dollars on defense, and Huntington’s products are, more or less, essential. Aircraft carriers, submarines, destroyers, and other vessels support and protect the nation’s interests at home and abroad. In particular, aircraft carriers play the most important role and, as mentioned, Huntington is the sole manufacturer of these giant vessels. The United States currently possesses 11 carriers, which are stationed at strategic points around the globe. One carrier, which is supported by a number of other ships and aircraft, has the ability to orchestrate entire operations, and can strike virtually any target at anytime. Currently, Huntington is working on two new aircraft carriers. The Gerald R. Ford is scheduled for delivery in 2015, while the company just recently began initial construction on the John F. Kennedy. As these ships, along with many other projects, reach various phases of completion, Huntington receives payments from the U.S. government.
Having essentially one customer tends to be a risky proposition for any business concern. True, the U.S. military will always need ships and related products. That said, the majority of Huntington’s offerings are of the big-ticket variety, which commonly come under great scrutiny during budget negotiations. For example, current estimates suggest that the Gerald R. Ford will cost approximately $9 billion, which does not include maintenance and personnel expenses. Recently, due to the nation’s hefty debt load, a number of government officials have been searching for methods to reduce spending, and it appears that a reduction of the Defense Budget will be a focus. At this time, it is too early to tell which programs will be reduced or eliminated, and we suggest that interested subscribers await our ongoing Huntington Ingalls coverage for more information. All told, with only one major customer, Huntington Ingalls’ prospects rest in the prosperity and military needs of the United States of America.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.