Which Is A Better Defense Pick – Huntington Ingalls Stock Or BWX Technologies?

BWXT: BWX Technologies logo
BWX Technologies

We believe that Huntington Ingalls Industries stock (NYSE:HII), a military shipbuilding company, is currently a better pick than its industry peer – BWX Technologies stock (NYSE: BWXT), a supplier of nuclear components and fuel. BWXT stock trades at a higher multiple of 3.4x sales, versus 0.9x revenues for HII. This can partly be attributed to its superior profitability and financial position. There is more to the comparison, and in the sections below, we discuss why we think HII will outperform BWXT in the next three years. We compare a slew of factors, such as historical revenue growth, returns, and valuation in an interactive dashboard analysis – Huntington Ingalls vs. BWX Technologies: Which Stock Is A Better Pick?

1. BWXT Stock Has Fared Better In The Last Three Years

HII stock has seen strong gains of 45% from levels of $170 in early January 2021 to around $245 now, vs. gains of 60% for BWXT from $60 to $95 over the same period. This compares with about 45% gains for the S&P 500 over this period. HII is one of a handful of stocks that have increased their value in each of the last three years, but that still wasn’t enough for it to consistently beat the market. Returns for the stock were 10% in 2021, 24% in 2022, and 13% in 2023. Returns for BWXT stock were -21%, 21%, and 32% in these years, respectively. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that HII underperformed the S&P in 2021 and 2023 and BWXT underperformed the S&P in 2021.

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In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for heavyweights in the Industrials sector including GE, CAT, and HON, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could HII and BWXT face a similar situation as they did in 2021 and underperform the S&P over the next 12 months — or will they see a strong jump? While we expect both stocks to trend higher, HII will likely outperform BWXT.

2. Huntington Ingalls Has Seen Better Revenue Growth

Huntington Ingalls has seen its revenue rise at an average annual rate of 7% in the last three years, faring slightly better than 6% for BWX Technologies.

BWX Technologies’ revenues are clubbed into two segments – Government operations, and Commercial operations. While Nuclear Components and Fuel, Uranium Processing and Nuclear Services, and Advanced Reactor Design and Engineering fall under government operations, Nuclear Manufacturing and Nuclear Services and Engineering are part of its commercial operations. Note that BWX derives around 80% of its revenue from the government contracts, including designing and manufacturing nuclear components for the U.S. Navy and the Department of Energy. The government operations segment has been the key growth driver for the company lately. BWX divested its U.S. based commercial nuclear services business to Framatome in 2021. The advance reactor design and engineering revenue has risen 3x between 2021 and 2023, while uranium processing and nuclear service revenue is up 39% over this period.

Huntington Ingalls’ revenue growth lately can be attributed to higher volumes for its Mission Technologies, Newport, and Ingalls segments. The company saw higher volume for its surface combatants, amphibious assault ships, aircraft carrier construction and engineering, and C5ISR and CEW&S contracts. Looking forward, both BWX Technologies and Huntington Ingalls’ revenue are expected to rise at a mid-single-digit average annual rate. While Huntington’s revenue is expected to top $13 billion, BWX Technologies will likely see its revenue rise to around $3 billion in the next three years.

3. BWX Technologies Is More Profitable And It Has A Better Financial Position

Huntington Ingalls’ operating margin of 6.5% in 2023 has declined from 8.2% in 2020, while BWX Technologies’ operating margin contracted from 15.5% to 13.4% over this period. For Huntington, the profit margin varies contract to contract, and it has been facing headwinds lately owing to shipyard labor retention issues, along with delays in certain programs, including the Virginia Class submarine program.

Looking at financial risk, BWX Technologies fares better than Huntington, with its 14% debt as a percentage of equity being lower than 27% for the latter. Moreover, its 2% cash as a percentage of assets is higher than <1% for Huntington, implying that BWX Technologies has a better debt position and more cash cushion.

4. The Net of It All

We see that although Huntington has demonstrated better revenue growth, BWX Technologies is more profitable and has a better financial position. Now, looking at prospects, we believe HII is the better choice of the two, given its attractive valuation. At its current levels, HII stock is trading at 0.9x trailing revenues, aligning with its last five-year average P/S of 0.9x. On the other hand, BWXT stock is trading at 3.4x revenues, versus a 2.6x average over the last five years. Our Huntington Ingalls Valuation and BWX Technologies Valuation dashboards have more details.

While some of this gap in P/S multiple for BWX Technologies makes sense, given its superior profitability, we think this gap will narrow in favor of Huntington, with its comparatively attractive valuation.

While HII may outperform BWXT in the next three years, it is helpful to see how Huntington Ingalls’ Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

Returns Jul 2024
MTD [1]
YTD [1]
Total [2]
 HII Return 0% -5% 34%
 BWXT Return -1% 23% 137%
 S&P 500 Return 0% 15% 145%
 Trefis Reinforced Value Portfolio 0% 6% 653%

[1] Returns as of 7/2/2024
[2] Cumulative total returns since the end of 2016

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