Huntington Ingalls Industries Inc. Earnings: 1 Number Tells You All You Need to Know

Last month, defense contractor Northrop Grummanreported 17% earnings growth despite shrinking sales, setting its share price off on a tear. Over the past three weeks, Northrop stock is up 13% -- but it could have done even better than that.

Four years ago, if you recall, Northrop Grumman unloaded its struggling, hurricane-battered shipbuilding division, setting Huntington Ingalls free to sink or swim on its own. Turned out, though, Huntington swam just fine solo -- as revealed in its earnings report last week, which showed:

  • Sales up 2% year over year at $7 billion for fiscal 2014.
  • Operating profit margin growing 190 basis points to end at 9.4% for the year.
  • Net profits up 30%.
  • And profits per diluted share growing 32%, to $6.86 per share.

In other words, as well as Northrop did last year, its spun-off Huntington Ingalls unit did even better! And Huntington's good news doesn't end there.

Turning from GAAP profits to their more tangible cousin, free cash flow, we find Huntington Ingalls churning out cash at the rate of $551 million last year. That's more than a fivefold increase over 2013's $97 million FCF figure (according to S&P Capital IQ). And even here, the good news doesn't end.

The 1 number that tells the futureGratifying as it is to see Huntington Ingalls' revenues climb in an era of tight defense spending, and good as it is to see profit margins expanding, and yielding net profits growth far in excess of sales growth, these numbers primarily tell us what Huntington has done in the past. The number that tells us how things might play out in the future, however, is: backlog.

Here's where the Huntington Ingalls story gets really good. In 2014, Huntington recorded $10.1 billion in "new business awards" (bringing total backlog to $21.4 billion). $10.1 billion is $3.1 billion more than the revenues that Huntington recorded in 2014. As a result, the company's book-to-bill ratio for the year was a sterling 1.4. Meaning, Huntington brought in 40% more work to be done in the future through the "in" door than left its doors through the "out" last year. Meaning, the 2% rise in revenues we saw in 2014 is almost certain to itself rise in future quarters.

Combined with new and improved levels of profitability, that foretells very good things for Huntington Ingalls stock. When you consider further that this stock is now selling for just 12.2 times trailing free cash flow, and that profits growth is estimated at better than 19% annualized over the next five years (according to the analysts who follow Huntington Ingalls), I'd say this foretells good things for shareholders of Huntington Ingalls as well.

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