Huntington Ingalls Industries, Inc. HII is slated to report first-quarter 2015 results on May 7, 2015. Last quarter, the company had posted a negative earnings surprise of 7.88%. Let’s see how things are turning out for the first quarter.
Why a Likely Positive Surprise?
Our proven model shows that Huntington Ingalls is likely to beat earnings this season because it has the right combination of two key ingredients. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) to beat estimates. Huntington Ingalls has the right mix.
Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, stands at +2.91%. This is because the Most Accurate estimate is at $2.12 while the Zacks Consensus Estimate is pegged lower at $2.06. This is a meaningful and leading indicator of a likely positive earnings surprise.
Zacks Rank: Huntington Ingalls currently carries a Zacks Rank #3.
The company’s Zacks Rank #3 and positive ESP make us reasonably confident of a positive earnings beat.
Note that stocks with a Zacks Rank #1, 2 or 3 have a significantly higher chance of beating earnings. Conversely, Sell-rated stocks (#4 and 5) should never be considered going into an earnings announcement.
Factors at Play
The largest military shipbuilder in the U.S., Huntington Ingalls is the prime industrial employer in Virginia. Huntington Ingalls, originally an affiliate of Northrop Grumman Corp. (NOC), was spun off in Mar 2011. It operates major shipyards in Louisiana, Mississippi and Virginia. Despite budget austerities, Huntington Ingalls remains well-positioned on the strength of its effective execution skills and diverse product offerings.
Apart from wining several small ticket programs, notable awards comprised a $499.8 million contract for the construction of the eighth National Security Cutter (“NSC”) – Midgett − for the U.S. Coast Guard as well as a $604.3 million contract modification to fund construction of the Arleigh Burke-class (DDG 51) Aegis guided missile destroyer DDG 121 for the U.S. Navy.
It has also received a modification contract from the U.S. Navy worth $224.4 million for refueling and modernization of the aircraft carrier USS George Washington. The U.S. Navy had previously contemplated retiring USS George Washington instead of refueling it owing to the tepid budget.
However, the U.S. Navy/Marine Corps has been allocated the largest chunk of the proposed fiscal 2016 Department of Defense (DoD) budget at 30.1% or $161 billion. The DoD has also proposed the funding of nine new ships worth $11.6 billion and the overhaul of USS George Washington for $678 million.
Another notable move by Huntington Ingalls Industries in the first quarter was the acquisition of Engineering Solutions Division (“ESD”) of the Columbia Group. The ESD serves the U.S. Navy and is involved in the production of specialized manned and unmanned undersea vehicles. The division will now operate as a subsidiary of Huntington under the name Undersea Solutions Group and report to Newport News Shipbuilding’s Submarine and Fleet Support division.
As Huntington is engaged in building naval ships and submarines, this acquisition will complement its business and enhance capabilities. It will also allow the company to meet the rising demand for unmanned vehicles from the U.S. Navy, thereby adding to its top line.
Apart from acquisitions, the company is restructuring its business to trim costs and improve operational efficiency. In Jan 2015, the company combined two of its subsidiaries, S.M. Stollar Corp. and Newport News Nuclear, to form one company – Stollar Newport News Nuclear (“SN3”). The company believes that the move will boost the market competitiveness of these businesses. In a sense, SN3 will be a one-stop resource for nuclear operations and environmental services capabilities for the Department of Energy and the DoD.
Peer Releases
Lockheed Martin Corp. LMT posted first-quarter 2015 earnings of $2.74 per share, comfortably surpassing the Zacks Consensus Estimate of $2.48 by 10.5%. Earnings in the reported quarter however declined 4.5% from $2.87 per share a year ago, as lower fighter jet demand led to less revenue.
Northrop Grumman Corp. NOC delivered first-quarter 2015 adjusted earnings of $2.14 per share, missing the Zacks Consensus Estimate of $2.26 by 5.3%. The quarterly number decreased 7.4% from $2.31 per share a year ago.
General Dynamics Corp. GD announced first-quarter 2015 earnings from continuing operations of $2.14 per share, comfortably surpassing the Zacks Consensus Estimate of $1.94 by 10.3%. Earnings also increased 25.1% from the prior-year figure of $1.71, backed by improved operating margins.
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