The shipbuilder’s cost issues will take time to resolve.
Shipbuilder Huntington Ingalls Industries (HII 1.23%) posted disappointing quarterly results and cut its full-year guidance. Shares plunged following the announcement, ending down 30% for the month of October, according to data provided by S&P Global Market Intelligence.
Hard-to-solve cost problems
Huntington Ingalls is one of two major shipbuilders for the U.S. Navy, and owner of coveted defense assets, including the Newport News shipyard in Virginia. It is a long-cycle business that can be volatile quarter to quarter, but the latest results were far worse than Wall Street had anticipated.
The company earned $2.56 per share on sales of $2.7 billion, short of the $3.86 per share on sales of $2.87 billion consensus. Huntington Ingalls reported lower volumes on key shipbuilding programs and made some unfavorable adjustments to total costs on some future ships.
In a statement, CEO Chris Kastner said Huntington Ingalls has not yet been able to adjust to post-pandemic realities:
It bears repeating that nearly all of the ships currently under construction were negotiated prior to COVID, and since those contracts were signed, we have seen a significant loss of shipbuilding experience in our yards. Those ship contracts, which we are still operating under at Newport News, did not anticipate in their cost targets and risk limiting clauses the significant disruption of our workforce and supply chain, or extended periods of heightened cost inflation.
Following the announcement, Huntington Ingalls withdrew its five-year outlook for free cash flow. The company also cut its full-year 2024 shipbuilding revenue guidance to $8.8 billion, from $8.8 billion to $9.1 billion.
Is Huntington Ingalls stock a buy?
The Navy will need a lot of new ships in the years to come, and Huntington Ingalls as well as General Dynamics are poised to win a lot of that future business. But investors tempted to buy in should wait until Huntington Ingalls regains its bearings.
The results indicate that execution issues continue to plague the company, especially at Newport News, and labor productivity problems will take time to resolve.
There is some potential for upside, should Huntington Ingalls convince the Pentagon to rework existing contracts to help cover the increased costs, but that is far from certain. The most likely scenario is that Huntington Ingalls will be stuck in the doldrums for the foreseeable future.
Investors interested in defense stocks can find better, more diversified opportunities elsewhere in the sector.
Lou Whiteman has positions in General Dynamics. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
