Sometimes Wall Street doesn’t see the forest from the trees when it analyzes a company, focusing on largely irrelevant details rather than the “big picture.” The Street also occasionally harshly punishes companies for making investments in the short term that will pave the way for huge revenue and profit gains in the longer term.
Both of these factors played key roles recently in causing the shares of military shipbuilder Huntington Ingalls (HII) to plunge in the wake of its first-quarter earnings report. Following the Q1 results, HII stock tumbled to $319.54 as of the market close on May 6, from $363.37 as of the market close on May 4, the day before the results.
The shares sank because investors were upset by a drop in HII’s profit margins and by its negative free cash flow in Q1. But the company has huge opportunities in the conventional shipbuilding, autonomous ship, and missile defense spaces, and it is making investments now that will enable it to effectively exploit these huge opportunities in the medium-to-long-term.
Further, HII expects to generate positive free cash flow of $500 million to $600 million this year, indicating that its investments will start enabling major profit gains in the second half of this year. Finally, the firm’s valuation is now very attractive.
For all of these reasons, every investor should consider buying HII stock on weakness, as the shares look poised to soar tremendously over the next year or two.
Huntington’s Huge Opportunities
As I noted in a previous column, “According to a Google AI summary of a recent Barron’s article, Huntington Ingalls is ‘set to benefit from a naval budget that more than doubles to $65.8 billion for ship procurement.’”
Further, HII in January disclosed that it had obtained a very large deal from the Missile Defense Agency that could generate as much as $151 billion for the firm.
And speaking on the company’s Q1 earnings call, held on May 5, HII CEO Chris Kastner stated that HII was well-positioned to benefit from the Navy’s updated Medium Unmanned Surface Vessel Family of Systems (MUSV) program. He added that HII could also get a lift from America’s plans to meaningfully increase its spending on “unmanned and autonomous systems” going forward and from planned investments in autonomous ships within the framework of the AUKUS alliance. The company is “uniquely qualified” to enable the coordination between the manned and unmanned ships that Washington and its allies are seeking, Kastner said.
Investments and Expected Profitability Improvements
In order to exploit these opportunities and convert its $54 billion backlog into revenue, the company is making large investments now. For example, the firm is partnering with “leading AI companies” to improve its autonomy software, it hired “over 1.600 shipbuilders” in Q1 alone, and almost 200 apprentices graduated from its schools “this year,” Kastner reported. And with inflation remaining elevated, labor and materials costs are constantly climbing significantly.
Despite these investments and rising costs, Huntington continues to expect to generate free cash flow of $500 million to $600 million for 2026. The company’s free cash flow came in at -$461 million for Q1, while the midpoint of its free cash flow guidance range for Q2 is break-even. Therefore, in the second half of the year, the firm looks well-positioned to generate $1 billion of free cash flow in the second half of 2026, and the second half of the year could very well mark a key, positive turning point for the company.
Finally, Kastner suggested that the firm’s 2026 shipbuilding revenue could easily exceed its guidance. If the latter scenario does occur, the company’s free cash flow could very well come in significant above $1 billion in the second half of the year.
So with Huntington expecting to generate free cash flow of at least $1 billion in the second half of this year, concerns about its profitability are tremendously overdone.
Valuation and the Bottom Line on HII Stock
After Huntington’s revenue jumped 13.4% last quarter versus the same period a year earlier, its shares are changing hands at a forward price-earnings ratio of just 20.2 times. Given the firm’s rapid growth and outstanding prospects, that’s a very low valuation.
Consequently, I believe that the shares are well-positioned to soar in the medium-to-long term.
*This article is intended to be informational only; it is not financial advice.
