Ingalls Shipbuilding unit of
Huntington Ingalls Industries
) has received a fixed-price incentive 10-year sizeable contract
worth $3.33 billion from the U.S. Navy for the construction of
five Arleigh Burke-class destroyers (DDG 51s). The contract also
carries an option for engineering change proposals, design
budgeting requirements and post-delivery availabilities of these
ships. If the option is implemented, the value of the contract
would go up to $3.39 billion.
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A DDG ship is 509 feet long with a 66-foot beam. With a weight of
9,300 tons, the ship takes three and a half years to be built.
DDG class ships provide multi-mission offensive and defensive
capabilities. They have the capability to operate independently
and also as a part of carrier strike groups, surface action
groups, amphibious ready groups and underway replenishment
groups. Moreover, they can fight air, surface and subsurface
battles at the same time.
With this contract, the company succeeded in beating
General Dynamics Corporation
) that received a separate $2.84 billion contract from the U.S
Navy for the construction of four DDG 51s.
The largest military shipbuilder in the U.S., Huntington Ingalls
is the prime industrial employer in Va. Huntington Ingalls is a
spun-off unit of
Northrop Grumman Corporation
). In March this year, Huntington Ingalls received a Navy
contract to perform refueling and complex overhaul, or RCOH
operation, on a 25-year-old nuclear-powered Nimitz-class aircraft
carrier − USS Abraham Lincoln. The price of the contract is
valued at $2.6 billion. Per the agreement, Huntington Ingalls is
entitled to refuel the ship's reactors and modernize over 2,300
compartments, 600 tanks along with various systems.
Last month, the company reported first quarter results with an
operating margin of 6.1% versus 5.1% in the year-ago quarter.
Revenues were, however, approximately flat year over year. Going
forward, the company expects that its ongoing cost cut
initiatives would help in improving margins further. The company
expects the current contract to help the company in boosting its
margin to a range of 9% to 10% by 2015 compared to 5.3% in 2012.
Despite the positives we remain concerned about defense cutbacks
on high-cost platform programs and over-exposure to the
Department of Defense budget. The company presently retains a
short-term Zacks Rank #3 (Hold).
In the near term, we would advise investors to accumulate its
short-term Zacks Rank #1 (Strong Buy) peer
Erickson Air-Crane Inc.