Cost Hurdles Pose Challenges for Huntington Ingalls
As the owner of iconic defense assets, including the Newport News Shipyard in Virginia, Huntington Ingalls plays a vital role in national defense. However, the company’s Q3 performance fell short of expectations. HII posted earnings of $2.56 per share on $2.7 billion in revenue—well below Wall Street’s consensus estimate of $3.86 per share on $2.87 billion in sales.
The company attributed the earnings miss to reduced production levels and adverse cost adjustments for certain future shipbuilding programs. In a statement, CEO Chris Kastner explained that nearly all current ship contracts were negotiated pre-COVID, a factor that didn’t account for the subsequent rise in labor costs, supply chain disruptions, and significant productivity loss at their shipyards. As a result, Huntington Ingalls has struggled to adapt to these “post-pandemic realities.”
Revised Free Cash Flow and Revenue Outlook for 2024
Following the earnings release, Huntington Ingalls withdrew its five-year free cash flow guidance. It also revised its 2024 shipbuilding revenue forecast downward to $8.8 billion, dropping from its previous estimate range of $8.8 billion to $9.1 billion. This cautious outlook reflects the company’s need to address execution issues, particularly labor productivity at the Newport News shipyard, which is critical to long-term success.
Should Investors Consider Buying HII Stock?
Huntington Ingalls remains a crucial player in the defense sector, with the U.S. Navy expected to require a substantial fleet expansion in the coming years. However, investors may want to hold off on HII stock until the company resolves its execution challenges and restores productivity at its shipyards.
There’s potential for improvement if Huntington Ingalls negotiates with the Pentagon to adjust contracts and recoup rising costs. However, with no guarantees of contract revisions, Huntington Ingalls may continue facing near-term pressures. In this environment, defense-focused investors might find more stable, diversified options in the sector until HII stabilizes its performance.
