Why Huntington Ingalls Stock Popped on Thursday
Key Points
Huntington Ingalls stock crushed earnings forecasts this morning.
Even better, its free cash flow in Q3 was twice reported net income.
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Huntington Ingalls (NYSE:HII) shares surged 12.3% through 12:10 p.m. ET Thursday after the military shipbuilder raced past earnings projections this morning.
Heading into HII's Q3 report, analysts expected the defense company to earn only $4.36 per share on sales below $3.4 billion. In fact, HII earned $5.48 per share on sales of $3.5 billion.
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Huntington Ingalls Q3 earnings
Huntington Ingalls grew its sales 11% year over year in Q3, with both its major shipbuilding divisions, Newport News Shipbuilding and Ingalls Shipbuilding, contributing to the growth. The company also improved its operating profit margin earned on those sales by two full percentage points, rising to 7%.
Result: While top-line sales grew only 11%, earnings grew four times as fast -- 49% -- on the bottom line.
Free cash flow did even better. Whereas Huntington Ingalls generated a mere $16 million in cash profit in last year's Q3, this time around the company churned out $429 million in FCF -- twice its reported net profit.
What's next for Huntington Ingalls stock
Impressive performance? I think so. And Huntington Ingalls has no intention of slowing down. Turning to guidance, the defense contractor forecasts roughly $13.7 billion in sales through the end of this year. Profit margins may slip a bit from the heady levels seen in Q3, but HII still anticipates generating roughly $550 million in positive free cash flow this year.
My sole reservation: At its current $11 billion market capitalization, HII stock is trading at about 20x its likely FCF this year. On 14.5% long-term forecast earnings growth, that's a bit expensive. Then again, valued on price-to-sales, its stock is one of the cheaper defense stocks on offer, valued at a P/S of just 0.8x.
While currently on the fence, I'll be watching HII stock closely.
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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