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David Einhorn Initiates Position in Huntington Ingalls Industries

July 26, 2011 | About:
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David Einhorn is the president and founder of Greenlight Capital, a value-oriented hedge fund. Unlike other funds, Greenlight does not leverage its positions to increase returns, and the fund does not generate large trading volumes. Nevertheless, since the fund's inception in 1996, Greenlight has generated more than a 25% annualized net return. Einhorn is best known for short selling positions, most famously Allied Capital and Lehman Brothers, and his aggressive shorts in financials helped Greenlight prosper in its early days. However, he holds mostly long positions, emphasizing intrinsic value to achieve consistent returns and safeguard capital against market conditions. According to his latest 13G filings, Einhorn entered into a new holding in Huntington Ingalls Industries (HII) with 2,510,000 shares at an average price of $34.28.

Huntington Ingalls Industries (HII)

Huntington Ingalls Industries designs, builds and maintains nuclear and non-nuclear ships for the U.S. Navy and Coast Guard and provides after-market services for military ships around the globe. The company also develops and produces warships, including destroyers, amphibious transport dock ships and national security cutters for the surface Navy fleet, U.S. Coast Guard, U.S. Marine Corps, and foreign and commercial customers. Additionally, the company provides complex nuclear project management; safe management and handling of radiological materials and waste; and nuclear facility construction, commissioning, operations, and D&D services.

Huntington only recently became an independent, publicly traded company, trading on the New York Stock Exchange on March 31, 2011. It separated from Northrop Grumman Corp. (NOC) in a spin-off. Northrop Grumman is a global security company that provides innovative systems, products and solutions in aerospace, electronics, information systems, shipbuilding and technical services to government and commercial customers worldwide. Huntington stock began trading at roughly $37.50 a share, peaking in early April to $42.74. Since then, the stock has come back down, hitting its low at $32.91 in mid-July.

According to Huntington's first quarter report, sales decreased by 1.6% year-over-year to $1.68 billion. Total operating income was also down 2.3%, from $87 million to $85 million. However, results for the first quarter of 2010 include $17 million of business interruption insurance recovery related to Hurricane Ike. Net income increased from $41 million to $45 million, a 9.8% gain year-over-year, and diluted earnings per share also increased from $0.85 to $0.92. New contract awards during the first quarter totaled approximately $1.7 billion, making total company backlog $17.4 billion, a healthy number that should keep the company busy for the next few years. Unfortunately, negative free cash flow tripled from a $149 million loss last year to a $427 million loss this year. The company also gained an additional $1.7 billion in long-term debt on its balance sheet that it did not have prior to splitting off from Northrop Grumman, raising its debt-to-equity ratio to 3.26.

The stock currently has a market cap of $1.71 billion, a trailing P/E of 12.39, a forward P/E of 8.72, a P/S ratio of .25, and a P/B ratio of 1.23.

On 7/11/2011, it was reported by DefenseNews.com that U.S. Navy officials are "seriously considering a delay of two years before buying the most expensive ship the service needs to order, the aircraft carrier John F. Kennedy (CVN 79)." This could potentially affect Huntington's financial outlook, as all aircraft carriers are built at Huntington's Newport News shipyard in Virginia. The carrier would be worth between $10-$12 billion in revenue spread out over multiple years which could help affirm Huntington's status as a newly independent company. Should the navy delay the purchase of the aircraft carrier, it would add hundreds of millions of dollars in extra costs that would be paid to Huntington. However, if the navy cancels its order for the next carrier (CVN 80) as a result of further defense budget cuts, it would eliminate a possible $10 billion from Huntington's future revenues.

Other Headlines

On 4/1/2011, Huntington announced that the U.S. Navy awarded its Ingalls Shipbuilding division a contract for the construction of the 10th San Antonio-class amphibious transport dock, LPD 26. The contract is worth $1.5 billion.

On 6/15/2011, Huntington announced that Ingalls Shipbuilding was awarded a construction contract for the DDG 113 Guided Missile Destroyer. The award amount is considered "source selection-sensitive information."

On 7/14/2011, Huntington announced that the U.S. Navy has awarded Huntington a $98 million cost-plus-fixed-fee advance procurement contract modification for long-lead materials for LPD 27, the 11th amphibious transport dock ship of the USS San Antonio class. The advance procurement contract is worth $98.6 million.

On 7/20/2011, Huntington announced that its subsidiary AMSEC LLC was awarded an indefinite-delivery/indefinite-quantity multiple award contract from the U.S. Navy allowing an AMSEC-led team to compete for individual task orders solicited for service requirements.

This is part of GuruFocus Real Time Picks report, which reports the stock trades of Gurus within the last few days. For more information, go to Real Time Picks.

Rating: 2.7/5 (6 votes)

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