Military stocks firing up - US/India cooperation

In a rare meeting set for today, senior US and Indian officials will try to push past a range of diplomatic disputes to forge new military cooperation.

In the past there were several tensions between the two countries although overtime, the U.S. and India have come closer. One of the most important landmarks was the deal that legitimized India’s nuclear arsenal and opened the door to sales of nuclear technology from the U.S. 

Days ahead of this meeting, India has already approved the purchase of 24 Lockheed Martin Corp. Sikorsky MH-60R maritime helicopters for the Indian navy at an estimated cost of around $1.8 billion, emphasizing the growing synergy between the two countries.

We have already discussed the formation of Trump’s Space Force that will be up and running by 2020 and the relative demand this will be creating for the military sector. The deal with India will push further interest in this type of industry.

One interesting stock to follow is Huntington Ingalls Industry (HII) which is the largest military shipbuilding company in the US. The firm was founded in 2011 through a spin-off from Northrop Grumman and therefore has over 80 years of experience in the sector.

HII is a medium sized firm ($10 billion market cap) and still far off from larger firms like Lockheed ($93bn), Boeing ($203bn) or Raytheon ($53bn). Important to note that this firm is the sole builder of US navy aircraft carriers and also in charge of refuelling of nuclear powered carriers in the US.

Is this a good investment?

Let’s look at some number first:

- Forward P/E of 14.49 vs 47 PE industry (one of the lowest P/E in the sector)
- Price to FCF of 31.03. A lower number generally indicates that a company is undervalued and its price is relatively cheap in relation to its free cash flow. Again, in this case this is one of the lowest in the sector of similar sized firms.
- Increase in revenues by 8.7% YOY due to higher demand
- Increase in shareholders distributions (dividend and stock re-purchases)
- Net income increase of 53% from the previous quarter and +123% YOY
- Earnings per share on the rise

What should we do then?

The stock price is now hovering above the 200 MA which is serving as support. In this scenario I think we can make a two-fold trade:

Short at limit price of $235 which is the Support line (200 MA). In this way should the support be broken, for the short term, there is potential for the stock to can go a bit lower as existing investors take out some profits.

1st target will be at $227 and 2nd and final target at $212.

Stop Loss will be at $255.

For the long term however I prefer to be bullish.

The short trade is still to be placed cause in my opinion, although I am in favour of the stock, looking at technicals, there is potential for a downtrend and therefore we would be protecting our position with a market neutral trade for the first couple of weeks.

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