HII - Huntington Ingalls Industries

[stahleyp]

This was spun off recently from Northrop Grumman.

 

http://www.businessweek.com/news/2011-04-06/northrop-s-6-7-billion-spinoff-may-set-defense-trend.html

 

NOC's market cap comes in right under $20 billion. How can I calculate the market cap of HII? I looked at the Edgar forms, but can't find anything that looks reasonable.

 

The executive team seems to be compensated from the standpoint of capital appreciation. For instance, C. Michael Petters, President and CEO has a base salary of $900,000 with an annual bonus of up to 125% of base. In addition, he has RPSRs and RSRs of 108,433 and 60,240, respectively.

 

For the RPSRs, this is how they are set up

 

"The RPSR Terms provide that the RPSRs will vest based on the performance of the Company during the period of time from January 1, 2011 to December 31, 2013 (the “Performance Period”). Performance will be measured against operating margin criteria and free cash flow criteria that have been established by the Compensation Committee. Between 0% and 200% of the number of RPSRs subject to a particular award will vest based on actual Company performance during the Performance Period. To the extent that an RPSR vests, the holder will be entitled to receive from the Company an equivalent number of shares of the Company’s common stock, or, in the discretion of the Compensation Committee, cash of equivalent value at the time of vesting or a combination of shares of common stock and cash. RPSRs that vest will be paid in 2014. RPSRs subject to the award will terminate if the holder of the award ceases to be an employee of the Company or one of its subsidiaries before the end of the Performance Period, unless the holder’s employment terminates due to retirement, death or disability more than six months after the start of the Performance Period, in which case the holder will be entitled to prorated vesting at the end of the Performance Period of the portion of his or her RPSRs that would have vested based on Company performance at the end of the period had his or her employment continued through that time. "

 

So, if my understanding is correct, both can covert to common shares. If we combine 108,433 and 60,240 we get 168,673 shares at $38.71 would be valued at about $6.5 million, much, much more than his salary. With such a large share of total compensation, they have a real incentive to enhance shareholder value.

 

In addition, some of NOC's debt is being added to the spin off. As we all know, leverage can be bad or good, but it can certainly juice returns for a young spin off.

 

Disclosure: This is not within my circle of competence and I do not have a position. I was hoping some of the more experienced board members might shed some light on this idea. 

[gfp]

http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NDE4Njk3fENoaWxkSUQ9NDMxODk0fFR5cGU9MQ==&t=1

 

This is the road show presentation.  Market cap is 48.8 million shares * 38.65 -->  ~$1.9 Billion

[stahleyp]

Thanks for that.

 

The presentation left a bit too be desired. I don't like the fact that management is espousing the virtues of EBITDA. A few years ago, Buffett warned about management who uses EBITA for companies that are highly leveraged.

[handycap5]

Would someone who is doing work on this please comment on the gross pension and related liabilities?  The large gross liability related to the market cap makes me nervous that the pensioners could end up owning the company in a significant downturn.  But perhaps there is a shift to the government of the pension liabilities through CAS accounting and related contracts. Appreciate your work. 

[oddballstocks]

Hey,

 

    I ended up looking into HII and buying.  When I first took a look at the company my first impression is this is something I'd never want to invest in, but after spending a lot more time understanding their business and position my opinion changed.  I think this is a classic LBO scenario, there is a small amount of equity, so any increase in earnings is significantly leveraged to the shareholder.

    What I find interesting is if you just work off the spin-off filing net doesn't look that good, but if you pair that with the presentation I think it's favorable.  If the company is able to achieve 5% cost savings on the same revenue they could earn $6 in 2011.  While this sounds wild I don't think it's unreasonable, management has indicated as much in their presentation.

    As to the leverage, it scared me initially as well, I'm a net-net type of investor, and I hate encumbered assets.  But with HII the revenue is as guaranteed as you can get in the business world. 

    I did a bigger writeup of my thoughts on my blog:  http://oddballstocks.blogspot.com/2011/04/is-huntington-ingalls-cheap.html

 

    Thoughts are appreciated!

[jay21]

Forgot to bump this for the last quarter.  Capital being returned to investors earlier than expected.  $150m buyback authorized on a ~2b market cap.  Also a very small dividend announced.