Huntington Ingalls stock target raised to $335 on budget outlook
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On Thursday, Wolfe Research adjusted its financial outlook for Huntington Ingalls (NYSE:HII) Industries, a major defense contractor known for its shipbuilding capabilities. The firm increased its price target on the company’s stock to $335 from the previous $300, while reaffirming its Outperform rating.
The revision reflects the analyst’s view of an improved fiscal year 2025 budget outcome and a rise in market multiples. The new price target is based on approximately 17 times the firm’s 2025 free cash flow estimates, aligning with the current trading multiples for 2024 estimates. Huntington Ingalls shares saw a modest increase of about 0.5% at the end of the trading day, compared to a broader market rise of 0.9%. Year-to-date, the stock has climbed roughly 12.5% and has surged about 50% over the past six months.
The analyst highlighted that while the investor day presentation by Huntington Ingalls outlined encouraging targets, it did not significantly exceed market expectations as most of the goals were previously discussed during the fourth quarter 2023 earnings call. The firm continues to recommend the stock as a valuable investment in the defense sector, citing its attractive free cash flow yields, increasing sales, and improving margins.
Despite a more protracted margin growth than initially anticipated, Wolfe Research anticipates that easing macroeconomic pressures and advancements in major programs, particularly the Virginia-class submarines (VCS), will expedite margin improvements. The company’s involvement in the Department of Defense’s shipbuilding budget is expected to provide revenue stability well into the 2030s, presenting an advantage over its competitors amidst uncertain economic conditions.
The analysis also points out that the potential from the company’s Mechanical Technologies (MT) business, demonstrated by significant recent contract wins, may not be fully appreciated by the market. The firm notes that while investors often react negatively to quarter-to-quarter fluctuations in shipbuilding margins, increased transparency from Huntington Ingalls and enhanced execution should highlight unique positive aspects of the company’s performance.
In determining the price target, Wolfe Research considered a multiple of around 17 times the estimated free cash flow per share for 2025, taking into account similar forward-looking multiples from one, three, and five-year projections.
This valuation also accounts for the overcapitalization of section 174, with the stock currently trading at approximately 16 times the 2025 free cash flow per share estimate, adjusted for section 174. The report concludes by stating that due to pension dynamics within the defense industry, price-to-earnings and enterprise value-to-EBITDA metrics are less reliable, hence the focus on free cash flow for valuation.
