Bernstein: HII’s third-quarter shipbuilding growth beats expectations, but improvements in output and margins remain uneven

What drove the third-quarter beat?

Huntington Ingalls Industries (HII) reported third-quarter 2026 revenue of 3.54 billion dollars, above the consensus of 3.37 billion dollars; diluted earnings per share were 5.48 dollars, above the consensus of 4.39 dollars.
Revenue in all three businesses exceeded consensus, with Newport News contributing the most: the division’s revenue was 1.91 billion dollars, up 18.1% year over year, driven primarily by increased aircraft carrier and submarine work.
Newport News’ operating margin was 6.9%, above market expectations of 6.0%. However, adjustments to estimated contract costs at completion were unusually large during the quarter; management expects the related volatility to moderate starting in the fourth quarter and regards approximately 6% as a reasonable baseline margin for new contracts once they enter the execution phase.

HII won 32.4 billion dollars in new contracts in the third quarter, and its backlog rose to 86.2 billion dollars; the company estimates that approximately 90% of its shipbuilding revenue through 2030 is covered by contracts. Recent Virginia-class and Columbia-class submarine contracts continue to support growth at Newport News.
The company raised its 2026 shipbuilding revenue guidance from 10.2 billion–10.4 billion dollars to 10.5 billion–10.7 billion dollars, increasing the midpoint by 300 million dollars, citing improvements in output and capacity; shipbuilding operating margin guidance remained at 6.0%–6.5%.
Bernstein accordingly raised its 2026 earnings-per-share forecast from 18.27 dollars to 19.81 dollars; however, it lowered its 2027 forecast from 20.41 dollars to 19.96 dollars because it expects lower non-service pension income.

Shipbuilding output rose approximately 9% year over year through the third quarter of this year, below the previous target of 15%, primarily reflecting a slower recovery in the Ingalls workforce. Management said current output assumptions are already incorporated into program estimates, and that maintaining growth of approximately 9% would not, in itself, trigger new unfavorable cost estimate adjustments.
Ingalls added a net 576 shipbuilders in the third quarter, its strongest growth in ten quarters; however, three ships simultaneously entered testing and delivery preparation, continuing to tie up engineering and production resources, while destroyer programs were also affected by coordination of engineering support, parts supply and production schedules.
Ingalls’ third-quarter revenue rose 5.8% year over year, but its operating margin fell to 6.7% from 7.9% a year earlier, below market expectations. Bernstein believes passing wage increases on to customers contributed to some revenue growth and also slightly diluted the margin; weaker performance on surface combatant programs also weighed on the margin.

Mission Technologies’ third-quarter operating margin was 9.0%, above market expectations of 4.3%, driven by the achievement of program milestones, increased unmanned systems work and higher equity earnings from joint ventures. The company raised the division’s 2026 operating margin guidance from approximately 5% to approximately 6%.
Bernstein raised its HII price target from 304 dollars to 352 dollars because of higher long-term shipbuilding revenue and margin forecasts, while maintaining its market-perform rating. Management believes the shipbuilding business should be able to return to a margin of 9%–10% over the long term.