Why Huntington Ingalls Is Sinking Today

Military shipbuilder Huntington Ingalls (NYSE: HII) missed quarterly expectations, and its issues are likely to continue into the new year.

Shares of Huntington Ingalls traded down 17% as of 11:15 a.m. ET, as investors see little reason to get excited about the stock right now.

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It's tough to turn a battleship

Huntington Ingalls is one of two major shipbuilders for the military, and its massive Newport News, Virginia, shipyard is responsible for producing the nation's aircraft carriers and other important vessels. But these ships are complex, and issues related to supply chain disruptions and higher-than-expected costs at Newport News weighed down quarterly results.

The defense contractor earned $3.15 per share in the quarter on sales of $3 billion, falling short of Wall Street's $3.38 per share on $3.06 billion expectations. Newport News posted a 2.4% margin and a 4.6% year-over-year sales increase, well below the 6.3% margin on declining sales posted by Huntington's Gulf Coast operation.

Part of the issue is the extended timetable from award to completion. Huntington Ingalls won a lot of the business it is now working to complete prior to the pandemic-related supply chain and labor issues. Deals that made economic sense at the time are now struggling to be completed profitability.

"We continue to make progress on ships put under contract pre-COVID, and are working diligently with our customers to put over $50 billion of new work under contract," CEO Chris Kastner said in a statement. "We enter 2025 focused on our mission to deliver the world's most powerful ships and all-domain solutions in service of the nation."

Is Huntington Ingalls stock a buy?

Eventually the pre-pandemic work will be done, but even then, it will not be clear sailing for Huntington Ingalls. With the U.S. military being judicious with ship purchases, Huntington will struggle to retain trained workers, which adds to the cost each time a new ship is commissioned.

Huntington, unlike most defense contractors, is overly reliant on only one branch of the military. The U.S. government needs Huntington's capabilities, and there should be a stream of new business up ahead. But for investors seeking sustained and predictable returns, there are better options among defense stocks.

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Lou Whiteman 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.