Huntington Ingalls has had an impressive run over the past six months as its shares have beaten the S&P 500 by 17.6%. The stock now trades at $271, marking a 33.3% gain. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.

Is now the time to buy Huntington Ingalls, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.

Why Do We Think Huntington Ingalls Will Underperform?

We’re glad investors have benefited from the price increase, but we're sitting this one out for now. Here are three reasons you should be careful with HII and a stock we'd rather own.

1. Weak Backlog Growth Points to Soft Demand

We can better understand Defense Contractors companies by analyzing their backlog. This metric shows the value of outstanding orders that have not yet been executed or delivered, giving visibility into Huntington Ingalls’s future revenue streams.

Huntington Ingalls’s backlog came in at $56.86 billion in the latest quarter, and over the last two years, its year-on-year growth averaged 4%. This performance was underwhelming and suggests that increasing competition is causing challenges in winning new orders.

2. EPS Growth Has Stalled

Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.

Huntington Ingalls’s flat EPS over the last five years was below its 5.3% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded.

3. New Investments Fail to Bear Fruit as ROIC Declines

ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Huntington Ingalls’s ROIC has unfortunately decreased. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Final Judgment

Huntington Ingalls falls short of our quality standards. With its shares topping the market in recent months, the stock trades at 17.8× forward P/E (or $271 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are better stocks to buy right now. We’d recommend looking at the most dominant software business in the world.

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