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Huntington Ingalls’ (HII) Stable Finances to Aid Q4 Earnings?


Huntington Ingalls Industries, Inc. HII is set to report fourth-quarter 2017 results on Feb 15, before the market opens.

While the company’s stable financial position is expected to drive fourth-quarter results, doubt remains whether its Newport News segment will continue to remain on a growth trajectory.

Last quarter, this military shipbuilder delivered a positive earnings surprise of 17.63%.

Let’s discuss the factors influencing Huntington Ingalls’ quarterly results, in brief.

Stable Financials – A Key Catalyst

A stable financial position backed by a strong cash generation capacity enables Huntington Ingalls to follow a disciplined capital spending program. In addition, the company focuses on maximizing shareholder value, through both share repurchases and increased dividend payouts. In November 2017, the company raised quarterly dividend to 72 cents per share, up 20% from the previous payout. Management, along with the dividend hike, increased the company’s share repurchase program from $1.2 billion to $2.2 billion. During the first nine months of 2017, Huntington Ingalls repurchased common stock worth $152 million. These moves show the company’s confidence in consistent free cash flow generation.

Notably, the company’s net cash from operating activities at the end of third-quarter 2017 was $380 million, while its free cash flow was $5 million. Considering, the dividend hike as well as raised share repurchase program announced by management during the fourth quarter, we expect the company’s upcoming results to show similar solid financial stability as well.

Will Newport News Segment Continue to Tread on Growth Path?

Huntington Ingalls’ Newport News is the nation's sole designer, builder and refueler of nuclear-powered aircraft carriers. This division, which generates more than 50% of the company’s total revenues, has been underperforming for the last few years. Interestingly, in the third quarter, this segment’s top line rebounded and registered year-over-year growth of 7.7%.

However, as per management, the macro trend at Newport News is that it is on the front end of a bunch of new programs across all its product lines. The team is currently engaged in the transition on its aircraft carrier and submarines programs. So there remains a cause of concern because it may take time for demand to wind up for these new programs, which in turn may dent the segment’s top line in the near term. In line with this, the Zacks Consensus estimate of revenues for Newport News unit stands at $1,053 million for the fourth quarter, reflecting an annual decline of 5.9%.

Dearth of Order in Q4: A Killjoy?

A steady inflow of orders from Pentagon has always provided an impetus to Huntington Ingalls’ results. However, in the fourth quarter the company did not win any notable contract. Nevertheless, considering solid contributions from Camber acquisition along with robust sales volume, overall sales growth for Huntington Ingalls’ fourth quarter remains positive. Notably, our consensus estimate for revenues is estimated at $2.01 billion, implying a 4.3% year-over-year increase.

Moreover, the corporate-friendly tax reform adopted by the U.S. government will most likely boost the company’s earnings that will get reflected in the yet-to-be reported quarter’s results.

Here’s What Our Quantitative Model Predicts

Huntington Ingalls currently has the right combination of two main ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

Zacks ESP: The Earnings ESP for the company is +5.32%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Huntington Ingalls sports a Zacks Rank #1 (Strong Buy), which along with a positive ESP increases the chances of an earnings beat.

Conversely, we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are some defense companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:

Astronics ATRO is expected to report fourth-quarter 2017 results on Feb 16. The company has an Earnings ESP of +14.94% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Curtiss-Wright CW is expected to report fourth-quarter results on Feb 21. The company has an Earnings ESP of +0.94% and a Zacks Rank #2 (Buy).

FLIR Systems FLIR is expected to report fourth-quarter results on Feb 14. The company has an Earnings ESP of +0.36% and a Zacks Rank of 3.

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