Shareholders of Huntington Ingalls would probably like to forget the past six months even happened. The stock dropped 33.5% and now trades at $297.79. This may have investors wondering how to approach the situation.
Is there a buying opportunity in Huntington Ingalls, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think Huntington Ingalls Will Underperform?
Despite the more favorable entry price, we’re sitting this one out for now. Here are three reasons you should be careful with HII, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance can indicate its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Unfortunately, Huntington Ingalls’s 6.6% annualized revenue growth over the last five years was mediocre. This fell short of our benchmark for the industrials sector.
2. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for Huntington Ingalls, its EPS declined by 1.9% annually over the last five years while its revenue grew by 6.6%. This tells us the company became less profitable on a per-share basis as it expanded.
3. Free Cash Flow Margin Dropping
Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, Huntington Ingalls’s margin dropped by 5.7 percentage points over the last five years. This along with its unexciting margin puts the company in a tough spot, and shareholders are likely hoping it can reverse course. If the trend continues, it could signal it’s becoming a more capital-intensive business. Huntington Ingalls’s free cash flow margin for the trailing 12 months was breakeven.
Final Judgment
Huntington Ingalls falls short of our quality standards. Following the recent decline, the stock trades at 15.6× forward P/E (or $297.79 per share). This valuation tells us a lot of optimism is priced in - we think there are better stocks to buy right now. We’d recommend looking at one of our all-time favorite software stocks.
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