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Investors are looking for winners as government officials inch closer to a defense budget, and Huntington Ingalls (NYSE: HII) looks like a potential winner. Shares of the shipbuilder are trading up 5% on Friday as I write this after receiving a double upgrade from Goldman Sachs.
Opportunities ahead
Huntington Ingalls is one of two primary shipbuilders for the U.S. Navy, operating out of the Newport News shipyard in Virginia and smaller yards on the Gulf Coast. The company is the nation's sole builder of aircraft carriers and makes much of the U.S. nuclear sub fleet.
The defense company has been sailing through choppy waters of late. It takes years to build these big vessels, and Huntington Ingalls in some cases is still operating under contracts signed before the pandemic. Labor and raw material costs have soared since then, and in many cases Huntington Ingalls has been forced to eat that added expense.
But Goldman Sachs analyst Noah Poponak sees clear sailing up ahead. The bank yesterday upgraded Huntington Ingalls to buy, from sell, and upped its price target to $234, from $145. The stock closed Thursday at $201.
The analyst believes Navy shipbuilding will be a relatively high priority for the Pentagon in the years to come. Huntington Ingalls could also benefit from the administration's focus on domestic labor issues and supply chains.
Earlier in the week, Navy Secretary John Phelan said domestic shipyards are "a big, big priority for the president."
Is Huntington Ingalls a buy?
Huntington shares are down nearly 30% from their early 2024 highs. It appears the tide might be turning in its favor, but investors should be patient.
This is not a quick-change industry. New ship awards today will not generate revenue for years, and any talk of new shipyards, even if funded by the government, would take nearly a decade to pay off for investors. That leaves a lot of time for plans to change, and priorities to shift.
There's some security for investors knowing companies like Huntington Ingalls are deemed essential, which hopefully limits the downside. But the upside from here could still take time.
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