3 Reasons to Avoid HII and 1 Stock to Buy Instead

Huntington Ingalls has had an impressive run over the past six months as its shares have beaten the S&P 500 by 20.9%. The stock now trades at $253.23, marking a 24% gain. This performance may have investors wondering how to approach the situation.

Is now the time to buy Huntington Ingalls, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.

Why Do We Think Huntington Ingalls Will Underperform?

We’re glad investors have benefited from the price increase, but we're sitting this one out for now. Here are three reasons why HII doesn't excite us and a stock we'd rather own.

1. Weak Backlog Growth Points to Soft Demand

Investors interested in Defense Contractors companies should track backlog in addition to reported revenue. This metric shows the value of outstanding orders that have not yet been executed or delivered, giving visibility into Huntington Ingalls’s future revenue streams.

Huntington Ingalls’s backlog came in at $48.05 billion in the latest quarter, and over the last two years, its year-on-year growth averaged 1.8%. This performance was underwhelming and suggests that increasing competition is causing challenges in winning new orders.

2. Free Cash Flow Margin Dropping

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

As you can see below, Huntington Ingalls’s margin dropped by 9.2 percentage points over the last five years. This along with its unexciting margin put the company in a tough spot, and shareholders are likely hoping it can reverse course. If the trend continues, it could signal it’s becoming a more capital-intensive business. Huntington Ingalls’s free cash flow margin for the trailing 12 months was negative 1.3%.

3. New Investments Fail to Bear Fruit as ROIC Declines

A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Huntington Ingalls’s ROIC has unfortunately decreased. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Final Judgment

Huntington Ingalls falls short of our quality standards. With its shares outperforming the market lately, the stock trades at 17.9× forward P/E (or $253.23 per share). This multiple tells us a lot of good news is priced in - we think there are better stocks to buy right now. We’d suggest looking at the Amazon and PayPal of Latin America.

Stocks We Would Buy Instead of Huntington Ingalls

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