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In a note to clients on Friday, Cowen analysts said Huntington Ingalls Industries Inc (NYSE:HII) is the firm’s top idea for 2023, labeling it a “sleeper.”
The analysts, who have an Outperform rating and $270 price target on the stock, told investors in a note that the reason behind their view is due to the company’s high revenue visibility, minimal sensitivity to economic macros, and attractive relative valuation in the favored defense sector.
HII shares are trading over 3% higher so far in Friday’s session.
“II is a “sleeper” within the defense sector, trading at 10.4x C23E EV/EBITDA (vs prime average of 16.7x) and a 6.4% C23 FCF yield. Our bullish thesis on HII owes to its valuation upside within the defense group, a favored sector that should post “real” growth given a growing DoD budget, but a sector with no “value” stocks left ex HII. This backdrop alongside HII’s targeted and visible 3%+ shipbuilding sales growth screen well vs broader industrials that face recessionary pressures,” the analysts wrote.
“HII’s low valuation reflects execution miscues and pricey M&A,” they added, also stating that these are “past errors unlikely to repeat.”
“Execution has improved since Q2:20, with positive net EACs in each qrtr since. HII programs are supported through C28, w/ few exceptions that may be “plussed up” by Congress. E.g. The DoD’s NDAA supports LPD & LHA production through #37 & #12 respectively, offering 5+ years of support. New ship/sub tech is a non-imminent threat, but HII has a role here via its Hydroid unit. HII says it is committed to returning substantially all FCF ex-debt repayment to shareholders through 2024. The stock’s volatility should ease now that mgmt is guiding both the year & the next Q — this reduces the “spread” of Street ests. as the year unfolds,” the analysts continued.
“The stock should re-rate higher as conviction grows in HII’s C23-24E FCF prospects.”
