On paper, military shipbuilder Huntington Ingalls Industries (NYSE:HII) should be an unexciting but consistent winner. Irrespective of political affiliation, Americans of various beliefs and ideologies seem to find common ground when it comes to China, the perennial adversary and threat. Given that China seeks to exert greater influence in the global stage, what better way to blunt this momentum then through naval power?
The only problem is, HII stock doesn’t seem to have gotten the memo. Up until the midweek session, Huntington Ingalls was conspicuously down for the year. And even with Wednesday’s sharp move higher, HII is still more than 34% below parity when viewed from the past 52 weeks. It begs the question: what exactly has been going on?
As a Business Insider article explained several days ago, it’s not that Huntington Ingalls — the U.S. Navy’s top shipbuilder — forgot how to do its craft. Rather, the report highlighted “inconsistent demand and workforce issues that have drastically affected industry's capacity. Navy officials and analysts have raised some of these concerns as well.”
During the Cold War, demand for warships was strong and consistent. However, the cooling of tensions effectively turned this spigot off, leading to demand erosion and a hollowed out workforce. In particular, experienced shipbuilders left the industry for other work.
Still, tensions have been steadily rising, with both China and Russia threatening to upset the post-Cold War paradigm. Most importantly for HII stock, it appears that President Donald Trump recognized the preparedness dilemma.
In his speech to Congress on Tuesday, the president stated that he was “going to resurrect the American shipbuilding industry, including commercial shipbuilding and military shipbuilding.” To accomplish this objective, he will “create a new office of shipbuilding in the White House that offers special tax incentives.”
Finally, HII stock looks promising — and while we may not see a 12.36% one-day lift like we did yesterday, Huntington Ingalls could be a reliable long-term investment.
In fairness, we’re not sure how Trump’s new shipbuilding initiative will pan out. Nevertheless, if the framework is more than just empty political rhetoric, HII stock could be a long-term value play.
At the moment, Huntington Ingalls trades for only 0.66X trailing-12-month (TTM) sales. That’s significantly lower than the multiple one year ago, which was at 1.02X. But prior to Trump’s address to Congress, Wall Street had anticipated that fiscal 2025 sales would reach $11.96 billion, up a modest 3.72% from the prior year.
Now that we learned about the shipbuilding office, analysts will need to reconsider the upside narrative. Under the post-speech paradigm, it’s more than possible that the company could reach the high end of the 2025 sales estimate spectrum, which stands at $12.17 billion. That would drop the sales multiple to 0.62X, making HII stock compelling — even with the yesterday’s 12% boost.
Finally, Huntington Ingalls offers passive income, with a forward yield of 2.79%. What’s more, the payout ratio sits at 32.72%, suggesting greater reliability of the dividend. As well, the company enjoys 13 years of consecutive dividend increases, a streak management is unlikely to give up without a fight.
