Why Huntington Ingalls shares sank in October

Shipbuilder Huntington Ingalls Industries (HII 1.25%) posted disappointing quarterly results and lowered full-year expectations. Shares fell after the announcement, falling 30% for the month of October, according to data provided by S&P global market information.

Difficult to solve cost problems

Huntington Ingalls is one of the U.S. Navy’s two major shipbuilders and owner of coveted defense assets, including the Newport News Shipyard in Virginia. It’s a long-cycle business that can be volatile from quarter to quarter, but the latest results were much worse than Wall Street expected.

The company earned $2.56 per share on revenue of $2.7 billion, below the consensus of $3.86 per share on revenue of $2.87 billion. Huntington Ingalls reported lower volumes for key shipbuilding programs and made some unfavorable adjustments to the total costs of some future ships.

In a statement, CEO Chris Kastner said that Huntington Ingalls has not yet been able to adapt to the post-pandemic reality:

It is worth repeating that virtually all ships currently under construction were negotiated before the corona crisis, and since the signing of those contracts we have seen a significant loss of shipbuilding experience in our yards. These vessel contracts, which we continue to operate under at Newport News, did not anticipate in their cost targets and risk mitigation clauses significant disruption to our workforce and supply chain, or extended periods of increased cost inflation.

Following the announcement, Huntington Ingalls withdrew its five-year free cash flow guidance. The company also lowered full-year 2024 shipbuilding revenue expectations to $8.8 billion from $8.8 billion.

Are Huntington Ingalls shares a buy?

The Navy will need many new ships in the coming years, including the Huntington Ingalls General dynamics are poised to capture a lot of that future business. But investors tempted to buy should wait until Huntington Ingalls gets back on its feet.

The results indicate that execution issues continue to plague the company, especially at Newport News, and that it will take some time to resolve labor productivity issues.

There is some potential for upside, should Huntington Ingalls convince the Pentagon to rework existing contracts to help cover the higher costs, but that is far from certain. The most likely scenario is that Huntington Ingalls will remain in the doldrums for the foreseeable future.

Investors interested defense stocks can find better, more diversified opportunities elsewhere in the sector.