Huntington Ingalls Is An Overlooked Value Now; Cowen Upgrades

Shipbuilding company Huntington Ingalls Industries Inc HII's shares are excessively discounted compared to its large-cap defense peer average, an analyst at Cowen said.

The Analyst

Cowen analyst Gautam Khanna upgraded shares of Huntington Ingalls from Market Perform to Outperform, and increased his price target from $252 to $275.

The Thesis

Huntington Ingalls is an overlooked value now but could be a beneficiary of an improvement in sentiment toward defense stocks due to a funding uptick in the forthcoming F19 defense budget request, lower corporate tax rates and geopolitical tensions, Khanna said in a note.

"Congressional support for an expanded Navy fleet is high, & stellar execution at Ingalls makes a continuation of key programs (e.g. LPD/LXR; NSC) likely," the firm said.

Given the improved visibility on Huntington Ingalls major ship programs and some short cycle upside opportunity presented by the Technical Solutions segment, Cowen said the discount at which the shares trade relative to large-cap defense group is excessive.

The firm said the 2019 DoD budget request due in February and Q4 earnings release scheduled for Feb. 15 could serve as near-term catalysts, broadening awareness concerning this forgotten name and narrow its relative discount versus peers.

Cowen sees a 15 percent earnings per share increase versus its previous estimate, and an $800 million incremental cash flow from a reduction in tax rate from 30-32 percent in 2017 to 18-20 percent in 2018.

The Price Action

Huntington Ingalls shares are up about 27 percent over the past year.

At time of writing, shares added 1.15 percent to $244.24.

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