Huntington Ingalls Industries Stock Is Believed To Be Modestly Undervalued

GuruFocus.com
·4 min read

- By GF Value

The stock of Huntington Ingalls Industries (NYSE:HII, 30-year Financials) shows every sign of being modestly undervalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $212.14 per share and the market cap of $8.5 billion, Huntington Ingalls Industries stock is estimated to be modestly undervalued. GF Value for Huntington Ingalls Industries is shown in the chart below.


Huntington Ingalls Industries Stock Is Believed To Be Modestly Undervalued
Huntington Ingalls Industries Stock Is Believed To Be Modestly Undervalued

Because Huntington Ingalls Industries is relatively undervalued, the long-term return of its stock is likely to be higher than its business growth, which averaged 12.4% over the past three years and is estimated to grow 1.87% annually over the next three to five years.

Link: These companies may deliever higher future returns at reduced risk.

Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Huntington Ingalls Industries has a cash-to-debt ratio of 0.22, which is worse than 74% of the companies in Aerospace & Defense industry. GuruFocus ranks the overall financial strength of Huntington Ingalls Industries at 5 out of 10, which indicates that the financial strength of Huntington Ingalls Industries is fair. This is the debt and cash of Huntington Ingalls Industries over the past years:

Huntington Ingalls Industries Stock Is Believed To Be Modestly Undervalued
Huntington Ingalls Industries Stock Is Believed To Be Modestly Undervalued

Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Huntington Ingalls Industries has been profitable 9 over the past 10 years. Over the past twelve months, the company had a revenue of $9.4 billion and earnings of $16.56 a share. Its operating margin is 7.43%, which ranks in the middle range of the companies in Aerospace & Defense industry. Overall, the profitability of Huntington Ingalls Industries is ranked 7 out of 10, which indicates fair profitability. This is the revenue and net income of Huntington Ingalls Industries over the past years:

Huntington Ingalls Industries Stock Is Believed To Be Modestly Undervalued
Huntington Ingalls Industries Stock Is Believed To Be Modestly Undervalued

Growth is probably one of the most important factors in the valuation of a company. GuruFocus' research has found that growth is closely correlated with the long-term performance of a company's stock. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. Huntington Ingalls Industries's 3-year average revenue growth rate is better than 78% of the companies in Aerospace & Defense industry. Huntington Ingalls Industries's 3-year average EBITDA growth rate is 7.2%, which ranks in the middle range of the companies in Aerospace & Defense industry.

Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Huntington Ingalls Industries's return on invested capital is 8.31, and its cost of capital is 7.69. The historical ROIC vs WACC comparison of Huntington Ingalls Industries is shown below:

Huntington Ingalls Industries Stock Is Believed To Be Modestly Undervalued
Huntington Ingalls Industries Stock Is Believed To Be Modestly Undervalued

In short, Huntington Ingalls Industries (NYSE:HII, 30-year Financials) stock is estimated to be modestly undervalued. The company's financial condition is fair and its profitability is fair. Its growth ranks in the middle range of the companies in Aerospace & Defense industry. To learn more about Huntington Ingalls Industries stock, you can check out its 30-year Financials here.

To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener.

This article first appeared on GuruFocus.