Its price is dramatically below its of intrinsic value.
In the world of investing, finding undervalued stocks with strong fundamentals can feel like striking gold. Huntington Ingalls Industries (HII), a leading U.S. defense contractor specializing in naval shipbuilding, has been quietly delivering value to shareholders. With its latest closing price at $234.54 (as of June 20, 2025), is HII a bargain worth considering? Using the Buffett and McGrew Valuation Methods, I’ve analyzed HII’s intrinsic value to uncover whether it’s a screaming buy, a hold, or overvalued. Let’s dive into the numbers and explore why HII might be a compelling opportunity for value investors.
Understanding HII’s Business
Huntington Ingalls Industries, headquartered in Newport News, Virginia, is America’s largest military shipbuilder. It designs, builds, and maintains nuclear-powered aircraft carriers and submarines for the U.S. Navy, alongside other naval vessels. With a stable backlog of government contracts and a critical role in national defense, HII benefits from predictable revenue streams, making it an attractive candidate for value investing. However, recent financial volatility, particularly in its 2024 free cash flow (FCF), raises questions about its current valuation.
Valuation Approach: Buffett and McGrew Methods
To assess HII’s intrinsic value, I employed two robust valuation models: the Buffett Valuation Method, inspired by Warren Buffett’s discounted cash flow (DCF) approach, and the McGrew Valuation Method, which adjusts growth assumptions for dynamic companies. Both methods use HII’s financial data from 2020–2024, sourced from quarterly cash flow, balance sheet, and financial statements, to project future cash flows and discount them to present value.
Buffett Valuation Method
The Buffett method classifies stocks as growth or stable based on their 3-year FCF compound annual growth rate (CAGR). For HII, the 3-year FCF CAGR (2021–2023) is a robust 25.6%, driven by FCF growth from $429 million in 2021 to $678 million in 2023. This qualifies HII as a growth stock, warranting a 10% growth rate for years 1–10. Using a 2.5% perpetual growth rate and an 8% discount rate (4% Treasury yield + 4% risk premium), I projected FCF starting from 2023’s $678 million, calculated a terminal value, and discounted all cash flows to present value. Dividing by HII’s 39.13 million shares outstanding yields an intrinsic value of $561.92 per share. Applying a 25% margin of safety, the target price is $421.44.
McGrew Valuation Method
The McGrew method is more nuanced for growth stocks like HII. It starts with the 3-year FCF CAGR (25.6%) in year 1, linearly declining to 10% by year 7, then holding at 10% through year 10. The same 2.5% perpetual growth rate and 8% discount rate apply. This approach captures HII’s strong recent growth while tempering long-term expectations. The resulting intrinsic value is significantly higher at $936.05 per share, with a 25% margin of safety price of $702.04. The higher valuation reflects the McGrew method’s aggressive early growth assumptions.
Valuation Results
Here’s the valuation table summarizing the findings:
| Stock Ticker | Valuation Method | Intrinsic Value per Share | Price with 25% Margin of Safety | Last Closing Price | Valuation Status |
|---|---|---|---|---|---|
| HII | Buffett Valuation | $561.92 | $421.44 | $234.54 | Screaming Buy |
| HII | McGrew Valuation | $936.05 | $702.04 | $234.54 | Screaming Buy |
Both methods indicate HII is a Screaming Buy, as its closing price of $234.54 is well below the 75% threshold of intrinsic value ($421.44 for Buffett, $702.04 for McGrew). This suggests significant upside potential, with the stock trading at a steep discount to its estimated fair value.
Financial Health: ROE, RONTE, and Debt to Equity
To complement the valuation, I examined HII’s financial metrics for the TTM ending March 31, 2025:
- Return on Equity (ROE): 12.44%, calculated as TTM net income of $546 million divided by average stockholders’ equity of $4.39 billion. This solid ROE reflects efficient use of shareholder capital.
- Return on Net Tangible Equity (RONTE): 57.18%, driven by a low net tangible asset base ($954.8 million after subtracting $3.43 billion in goodwill and intangibles). The high RONTE underscores HII’s profitability when excluding intangible-heavy assets, common in acquisition-driven firms.
- Debt to Equity Ratio: 0.70, based on average total debt of $3.13 billion and average equity of $4.46 billion. This moderate leverage indicates a manageable debt load, supported by stable cash flows from government contracts.
These metrics paint a picture of a financially sound company with strong profitability and prudent debt management, reinforcing the undervaluation thesis.
Risks and Limitations
While the valuation is compelling, investors should consider several risks:
- 2024 FCF Volatility: HII’s TTM FCF was negative at -$159 million, with an estimated 2024 FCF of $101 million, a sharp drop from 2023’s $678 million. This volatility, possibly due to operational or seasonal factors, could signal short-term challenges.
- Growth Assumptions: The 3-year FCF CAGR of 25.6% may overstate future growth, especially given the negative 5-year CAGR (-38.9%). The McGrew method’s aggressive early growth projections amplify this risk.
- Defense Sector Dependence: HII’s reliance on U.S. Navy contracts exposes it to government budget shifts, though long-term contracts mitigate this risk.
- Data Constraints: Without real-time data from sources like Yahoo Finance or SEC EDGAR, I relied on provided financials up to March 31, 2025. The closing price of $234.54 is assumed accurate for June 20, 2025, but verification was limited.
Why HII Could Be a Screaming Buy
HII’s valuation suggests it’s trading at a significant discount, offering a rare opportunity for value investors. The Buffett method’s conservative $561.92 intrinsic value implies a 139% upside from $234.54, while the McGrew method’s $936.05 suggests a 299% potential gain. Coupled with a solid ROE, high RONTE, and moderate debt, HII appears fundamentally strong. Its role in U.S. defense ensures stable demand, and its share repurchase program (e.g., treasury shares increased from 13.98 million in 03/31/2024 to 14.58 million in 12/31/2024) signals management’s confidence.
However, investors should monitor HII’s FCF recovery in 2025 and assess geopolitical and budgetary risks. The negative TTM FCF warrants caution, and further due diligence on operational efficiency is advised. If HII can return to its 2023 FCF levels, the current price could represent a generational buying opportunity.
Huntington Ingalls Industries stands out as a potential screaming buy, with both the Buffett and McGrew valuations indicating significant undervaluation at $234.54. Its strong financial metrics and critical role in U.S. defense make it a compelling pick for long-term investors. While risks like FCF volatility and sector dependence exist, the margin of safety in both valuations provides a buffer. For those seeking value in a turbulent market, HII deserves a closer look.
#ValueInvesting #StockMarket #HII #BuffettValuation #McGrewValuation #DefenseStocks #IntrinsicValue #ScreamingBuy #FinancialAnalysis #Investing
