| | | Buy (US$180.00 price target) | | UBS Research THESIS MAP | a guide to our thinking and what's where in this report | OUR THESIS IN PICTURES→ | | Q: Can shipbuilding revenues grow from here? Yes. We see upside to HII's guidance for flattish shipbuilding revenues. more→ Q: Can HII's margins move higher from here? We think so. While segment margins have moved considerably higher over the past several years on Gulf Coast improvement, we see further modest upside. | | We see revenues growing from current annual run rate at ~$7B, above guidance for flattish revenues from here. Combined with modest margin expansion and cash upside, we expect HII can grow EPS faster than currently expected. | | We have analyzed the budget for HII's largest shipbuilding programs in order to predict future revenue. Based on the budget trend for these programs along with the Navy's typical outlay rates, we forecast revenue growth for HII. | | Source: UBS estimates Market Pricing in Zero Growth and Flat Margins: After stressing our DCF model, we estimate the current levels for the stock are pricing in virtually zero sales growth and flat margins, in line with HII's conservative guidance. We see upside to valuation on ~2% top line growth and 30-40 bps margin expansion. ... more→ | | 
Value drivers | Segment margins | Long-term sales growth | Sharecount reduction (repurchase) | P/E Multiple | | $200 upside | 9.9% | 3-4% | 4%/year | 18x | | $180 base | 9.4% | 1-2% | 4%/year | 17x | | $140 downside | 8.8% | Flat | none | 14x | | Source: UBS | | | | | |
more→ | | Huntington Ingalls Industries (NYSE:HII) designs, builds, overhauls, and repairs ships primarily for the U.S. Navy and the U.S. Coast Guard. It is the nation's sole industrial... more → |
| | | OUR THESIS IN PICTURES | return ↑ | 
| While HII has guided to flattish sales from here, the budget for its largest programs implies growth. | 
| We see modest upside to HII's margins driven by Newport News on additional subs volume and upside on Kennedy (carrier) as compared to Ford. | 
| Meanwhile we estimate the current share price doesn't factor in any margin improvement from here… | 
| …and consensus estimates incorporate virtually zero top line growth. | Sources for exhibits above: Company data, UBS Research |
| | | PIVOTAL QUESTIONS | return ↑ | Q: Can shipbuilding revenues grow from here? UBS VIEW Yes. We see upside to HII's guidance for flattish shipbuilding revenues. EVIDENCE We have analyzed the budget for HII's largest shipbuilding programs in order to predict future revenue. Based on the budget trend for these programs along with the Navy's typical outlay rates, we forecast revenue growth for HII. WHAT'S PRICED IN? Consensus estimates for HII incorporate roughly flat sales through 2018. | |
Shipbuilding Budget Implies Revenue UpsideHII has guided to flattish revenue in its core shipbuilding business, however we forecast growth driven by Virginia class and Ohio Replacement subs along with an increase in carrier overhauls. We note DoD's most recent budget request includes 4-5% CAGR growth for shipbuilding from FY15-FY21. Figure 1: Navy Shipbuilding and Conversion Budget (Current $B) | 
| Source: DoD |
Specifically for the most recent FY17 budget, our analysis indicates a 7% increase for HII's largest programs (vs 3% decline for total modernization budget) and 14% CAGR growth from FY15-17 (vs 5% CAGR for total modernization). Figure 2: FY14-17 Growth for HII Raw & Adjusted for Subcontractor Status | 
| Source: DoD and US Coast Guard. Note: NSC funded through US Coast Guard (Homeland Security). |
We have analyzed the Navy and Coast Guard budget for HII's largest shipbuilding programs in order to predict future revenue. The budget for these programs has grown significantly over the past few years, driven by Virginia Class sub and DDG-51 destroyer. Figure 3: Historical Budget for HII's Largest Shipbuilding Programs | 
| Source: DoD, US Coast Guard and UBS estimates |
Based on the budget trend for these programs along with the Navy's typical outlay rates, we forecast revenue growth for HII. Specifically, for shipbuilding funds, the Navy estimates roughly 8% will be spent in the same year (FY16), 24% in the following year (FY17), 20% in FY18, etc. out to FY25 (Figure 4). Applying these outlay rates to the historical budget levels for these programs and adjusting for HII's share of each implies mid- to high-single-digit growth for HII's outlays on these programs over the next several years. Figure 4: Navy Shipbuilding Outlay Rates | | Figure 5: Implied Outlays for HII's Largest Programs (HII Share) | 
| | 
| Source: DoD | | Source: UBS estimates |
| | | WHAT'S PRICED IN? | return ↑ | 
| The stock appears to be pricing in flat sales and margins from here.
|
Source: UBS estimates Market Pricing in Zero Growth and Flat Margins: After stressing our DCF model, we estimate the current levels for the stock are pricing in virtually zero sales growth and flat margins, in line with HII's conservative guidance. We see upside to valuation on ~2% top line growth and 30-40 bps margin expansion. Figure 6: DCF Assumptions (Base Case) | 
| Source: UBS estimates |
Even after its recent outperformance, HII trades at a 10-15% discount to large-cap defense. Figure 7: HII Relative Valuation vs Large Cap Defense | 
| Source: FactSet and UBS estimates. Note: Large cap defense includes GD/LMT/NOC/RTN. |
| | | UPSIDE / DOWNSIDE SPECTRUM | return ↑ | 
Value drivers | Segment margins | Long-term sales growth | Sharecount reduction (repurchase) | P/E Multiple | | $200 upside | 9.9% | 3-4% | 4%/year | 18x | | $180 base | 9.4% | 1-2% | 4%/year | 17x | | $140 downside | 8.8% | Flat | none | 14x | | Source: UBS | | | | | |
| HII is trading
at US$159.29
(as of 16 June). |
Risk to the current share price is skewed to the upside (2:1) HII is trading at US$159.29 (as of 16 June). Upside (US$200): In our upside scenario we assume higher 3-4% top line growth with segment margins expanding close to 10% (50 bps above our base case) and ~4%/year sharecount reduction through repurchases. In this scenario our DCF values HII at $200, equivalent to an 18x multiple on higher 2017E EPS at $11.00. Base (US$180): In our base case we assume modest (~2%) revenue growth over the next few years driven by recent budget upside (carrier, Ohio Replacement, refueling/overhaul and LHA) along with 30-40 bps margin expansion over the next few years compared to 2015 levels and ~4%/year sharecount reduction through repurchases. In this scenario our DCF values HII at $180, equivalent to a 17x multiple on our 2017 EPS estimate at $10.65. Downside (US$140): In our downside scenario we model flat sales from here with segment margins compressing to the mid/high 8% range, with HII only buying back enough shares to offset creep. In this scenario our DCF values HII at $140, equivalent to a 14x multiple on our lower 2017E EPS at $10.00.
| | | COMPANY DESCRIPTION | return ↑ | Market Cap | US$8.01bn | Shares Outstanding | 49.1m (COM) | Industry | Defense | Region | Americas | Website | www.huntingtoningalls.com |
Huntington Ingalls Industries (NYSE:HII) designs, builds, overhauls, and repairs ships primarily for the U.S. Navy and the U.S. Coast Guard. It is the nation's sole industrial designer, builder, and refueler of nuclear-powered aircraft carriers, the sole supplier and builder of amphibious assault ships to the U.S. Navy, the sole builder of National Security Cutters for the U.S. Coast Guard, one of two companies designing and building nuclear-powered submarines for the U.S. Navy, and one of two companies building DDG-51 Arleigh Burke-class destroyers for the U.S. Navy. Industry outlook For defense, we forecast 4-5% revenue growth and mid-single digit CAGR for pre-pension EBIT over the next few years while EPS and FCF can grow faster on pension tailwind. Our top picks within defense are RTN/OA/GD/HII. | Revenues by customer type (%) 
Source: Company data, UBS estimates EBIT by product segment 
Source: Company data, UBS estimates |
| | | | | | Huntington Ingalls Industries Inc (HII.N) | | | | | | | | | | | Revenues | 6,820 | 6,957 | 7,033 | 7,077 | 0.6 | 7,053 | -0.3 | 7,286 | 7,471 | 7,532 | Gross profit | 1,251 | 1,428 | 1,431 | 1,727 | 20.7 | 1,500 | -13.2 | 1,539 | 1,557 | 1,545 | EBITDA (UBS) | 747 | 907 | 923 | 956 | 3.6 | 988 | 3.3 | 1,013 | 1,021 | 1,013 | Depreciation & amortisation | (235) | (205) | (188) | (187) | -0.7 | (194) | 3.8 | (202) | (211) | (221) | EBIT (UBS) | 512 | 702 | 735 | 770 | 4.7 | 794 | 3.2 | 811 | 809 | 792 | Associates & investment income | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Other non-operating income | 0 | (36) | 0 | (2) | - | 0 | - | 0 | 0 | 0 | Net interest | (118) | (112) | (92) | (72) | 22.2 | (70) | 2.1 | (70) | (70) | (70) | Exceptionals (incl goodwill) | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Profit before tax | 394 | 554 | 643 | 696 | 8.2 | 724 | 4.1 | 740 | 739 | 722 | Tax | (133) | (179) | (221) | (217) | 1.7 | (246) | -13.3 | (252) | (251) | (245) | Profit after tax | 261 | 375 | 422 | 479 | 13.4 | 478 | -0.1 | 489 | 488 | 476 | Preference dividends | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Minorities | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Extraordinary items | 0 | (37) | (18) | 0 | - | 0 | - | 0 | 0 | 0 | Net earnings (local GAAP) | 261 | 338 | 404 | 479 | 18.5 | 478 | -0.1 | 489 | 488 | 476 | Net earnings (UBS) | 261 | 375 | 422 | 479 | 13.4 | 478 | -0.1 | 489 | 488 | 476 | Tax rate (%) | 33.8 | 32.3 | 34.4 | 31.2 | -9.1 | 34.0 | 8.9 | 34.0 | 34.0 | 34.0 |
| | | | | | | | | | | EPS (UBS, diluted) | 5.18 | 7.60 | 8.74 | 10.25 | 17.3 | 10.65 | 3.9 | 11.35 | 11.80 | 12.00 | EPS (local GAAP, diluted) | 5.18 | 6.85 | 8.36 | 10.25 | 22.6 | 10.65 | 3.9 | 11.35 | 11.80 | 12.00 | EPS (UBS, basic) | 5.18 | 7.60 | 8.74 | 10.25 | 17.3 | 10.65 | 3.9 | 11.35 | 11.80 | 12.00 | Net DPS (US$) | 0.50 | 0.99 | 1.68 | 2.06 | 22.6 | 2.25 | 9.7 | 2.48 | 2.73 | 3.00 | Cash EPS (UBS, diluted) | 9.84 | 11.74 | 12.63 | 14.25 | 12.9 | 14.98 | 5.1 | 16.04 | 16.91 | 17.55 | Book value per share | 30.30 | 27.80 | 30.34 | 33.54 | 10.6 | 36.96 | 10.2 | 40.75 | 44.62 | 48.27 | Average shares (diluted) | 50.40 | 49.43 | 48.30 | 46.69 | -3.3 | 44.86 | -3.9 | 43.07 | 41.35 | 39.72 |
| | | | | | | | | | | Cash and equivalents | 1,043 | 990 | 894 | 912 | 2.1 | 972 | 6.5 | 1,037 | 1,100 | 1,152 | Other current assets | 1,633 | 1,556 | 1,390 | 1,410 | 1.4 | 1,385 | -1.8 | 1,360 | 1,335 | 1,310 | Total current assets | 2,676 | 2,546 | 2,284 | 2,322 | 1.7 | 2,357 | 1.5 | 2,397 | 2,435 | 2,462 | Net tangible fixed assets | 1,897 | 1,792 | 1,827 | 1,848 | 1.1 | 1,889 | 2.3 | 1,930 | 1,967 | 1,996 | Net intangible fixed assets | 1,409 | 1,573 | 1,451 | 1,428 | -1.6 | 1,404 | -1.7 | 1,380 | 1,356 | 1,332 | Investments / other assets | 243 | 358 | 462 | 438 | -5.2 | 438 | 0.0 | 438 | 438 | 438 | Total assets | 6,225 | 6,269 | 6,024 | 6,036 | 0.2 | 6,088 | 0.9 | 6,145 | 6,195 | 6,227 | Trade payables & other ST liabilities | 1,313 | 1,204 | 1,274 | 1,280 | 0.5 | 1,280 | 0.0 | 1,280 | 1,280 | 1,280 | Short term debt | 79 | 108 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Total current liabilities | 1,392 | 1,312 | 1,274 | 1,280 | 0.5 | 1,280 | 0.0 | 1,280 | 1,280 | 1,280 | Long term debt | 1,700 | 1,592 | 1,273 | 1,275 | 0.2 | 1,275 | 0.0 | 1,275 | 1,275 | 1,275 | Other long term liabilities | 1,612 | 2,000 | 1,987 | 1,915 | -3.6 | 1,875 | -2.1 | 1,835 | 1,795 | 1,755 | Preferred shares | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Total liabilities (incl pref shares) | 4,704 | 4,904 | 4,534 | 4,470 | -1.4 | 4,430 | -0.9 | 4,390 | 4,350 | 4,310 | Common s/h equity | 1,521 | 1,365 | 1,490 | 1,566 | 5.1 | 1,658 | 5.9 | 1,755 | 1,845 | 1,917 | Minority interests | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Total liabilities & equity | 6,225 | 6,269 | 6,024 | 6,036 | 0.2 | 6,088 | 0.9 | 6,145 | 6,195 | 6,227 |
| | | | | | | | | | | Net income (before pref divs) | 261 | 338 | 404 | 479 | 18.5 | 478 | -0.1 | 489 | 488 | 476 | Depreciation & amortisation | 235 | 205 | 188 | 187 | -0.7 | 194 | 3.8 | 202 | 211 | 221 | Net change in working capital | (260) | 120 | 134 | (5) | - | 25 | - | 25 | 25 | 25 | Other operating | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Operating cash flow | 236 | 663 | 726 | 660 | -9.0 | 697 | 5.5 | 716 | 724 | 722 | Tangible capital expenditure | (139) | (165) | (188) | (196) | -4.5 | (212) | -7.7 | (219) | (224) | (226) | Intangible capital expenditure | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Net (acquisitions) / disposals | 0 | 0 | 0 | 0 | - | 0 | - | 0 | 0 | 0 | Other investing | 58 | (272) | 47 | 0 | - | 0 | - | 0 | 0 | 0 | Investing cash flow | (81) | (437) | (141) | (196) | -39.3 | (212) | -7.7 | (219) | (224) | (226) | Equity dividends paid | (25) | (49) | (81) | (96) | -18.5 | (101) | -5.4 | (107) | (113) | (119) | Share issues / (buybacks) | (119) | (138) | (232) | (294) | -26.7 | (325) | -10.5 | (325) | (325) | (325) | Other financing | 31 | (66) | (75) | (50) | 33.33 | 0 | - | 0 | 0 | 0 | Change in debt & pref shares | (56) | (79) | (395) | 0 | - | 0 | - | 0 | 0 | 0 | Financing cash flow | (169) | (332) | (783) | (440) | 43.8 | (426) | 3.1 | (432) | (438) | (444) | Cash flow inc/(dec) in cash | (14) | (106) | (198) | 24 | - | 59 | 145.7 | 66 | 62 | 52 | FX / non cash items | 0 | 53 | 102 | (6) | - | 0 | - | 0 | 0 | 0 | Balance sheet inc/(dec) in cash | (14) | (53) | (96) | 18 | - | 59 | 219.8 | 66 | 62 | 52 |
Source: Company accounts, UBS estimates. (UBS) metrics use reported figures which have been adjusted by UBS analysts.Cash EPS (UBS, diluted) is calculated using UBS net income adding back depreciation and amortization.
Huntington Ingalls Industries Inc (HII.N) | | | | | | | | | P/E (local GAAP, diluted) | 11.7 | 14.6 | 14.7 | 15.5 | 14.9 | 14.0 | 13.5 | 13.3 | P/E (UBS, diluted) | 11.7 | 13.2 | 14.1 | 15.5 | 14.9 | 14.0 | 13.5 | 13.3 | P/CEPS | 6.2 | 8.5 | 9.7 | 11.2 | 10.6 | 9.9 | 9.4 | 9.1 | Equity FCF (UBS) yield % | 3.2 | 10.1 | 8.9 | 5.9 | 6.2 | 6.4 | 6.4 | 6.3 | Net dividend yield (%) | 0.8 | 1.0 | 1.4 | 1.3 | 1.4 | 1.6 | 1.7 | 1.9 | P/BV x | 2.0 | 3.6 | 4.1 | 4.7 | 4.3 | 3.9 | 3.6 | 3.3 | EV/revenues (core) | 0.6 | 0.9 | 1.1 | 1.3 | 1.3 | 1.2 | 1.2 | 1.2 | EV/EBITDA (core) | 5.8 | 6.8 | 8.2 | 9.5 | 9.2 | 8.9 | 8.7 | 8.7 | EV/EBIT (core) | 8.5 | 8.8 | 10.3 | 11.9 | 11.4 | 11.2 | 10.9 | 11.1 | EV/OpFCF (core) | 12.4 | 7.2 | 8.7 | 12.1 | 11.3 | 11.0 | 10.8 | 10.8 | EV/op. invested capital | 1.6 | 2.4 | 2.8 | 3.2 | 3.2 | 3.2 | 3.1 | 3.1 |
| | | | | | | | | Market cap. | 3,048 | 4,956 | 6,038 | 7,820 | 7,820 | 7,820 | 7,820 | 7,820 | Net debt (cash) | 755 | 723 | 545 | 371 | 371 | 371 | 207 | 207 | Buy out of minorities | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | Pension provisions/other | 529 | 507 | 1,001 | 930 | 890 | 850 | 810 | 770 | Total enterprise value | 4,332 | 6,186 | 7,584 | 9,121 | 9,081 | 9,041 | 8,837 | 8,797 | Non core assets | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | Core enterprise value | 4,332 | 6,186 | 7,584 | 9,121 | 9,081 | 9,041 | 8,837 | 8,797 |
| | | | | | | | | Revenue | 1.7 | 2.0 | 1.1 | 0.6 | -0.3 | 3.3 | 2.5 | 0.8 | EBITDA (UBS) | 35.6 | 21.4 | 1.8 | 3.6 | 3.3 | 2.5 | 0.8 | -0.8 | EBIT (UBS) | 43.0 | 37.1 | 4.7 | 4.7 | 3.2 | 2.0 | -0.1 | -2.2 | EPS (UBS, diluted) | 78.0 | 46.7 | 15.0 | 17.3 | 3.9 | 6.5 | 4.0 | 1.7 | Net DPS | NM | 99.9 | 69.2 | 22.6 | 9.7 | 10.0 | 10.0 | 10.0 |
| | | | | | | | | Gross profit margin | 18.3 | 20.5 | 20.4 | 24.4 | 21.3 | 21.1 | 20.8 | 20.5 | EBITDA margin | 11.0 | 13.0 | 13.1 | 13.5 | 14.0 | 13.9 | 13.7 | 13.4 | EBIT margin | 7.5 | 10.1 | 10.5 | 10.9 | 11.3 | 11.1 | 10.8 | 10.5 | Net earnings (UBS) margin | 3.8 | 5.4 | 6.0 | 6.8 | 6.8 | 6.7 | 6.5 | 6.3 | ROIC (EBIT) | 19.0 | 26.9 | 27.0 | 26.9 | 27.8 | 28.5 | 28.5 | 28.1 | ROIC post tax | 12.6 | 18.2 | 17.8 | 18.5 | 18.4 | 18.8 | 18.8 | 18.5 | ROE (UBS) | 23.8 | 26.0 | 29.6 | 31.3 | 29.7 | 28.6 | 27.1 | 25.3 |
| | | | | | | | | Net debt / EBITDA | 1.0 | 0.8 | 0.4 | 0.4 | 0.3 | 0.2 | 0.2 | 0.1 | Net debt / total equity % | 48.4 | 52.0 | 25.4 | 23.1 | 18.3 | 13.5 | 9.5 | 6.4 | Net debt / (net debt + total equity) % | 32.6 | 34.2 | 20.3 | 18.8 | 15.5 | 11.9 | 8.7 | 6.0 | Net debt/EV % | 17.0 | 11.5 | 5.0 | 4.0 | 3.3 | 2.6 | 2.0 | 1.4 | Capex / depreciation % | 67.5 | 99.4 | 122.1 | 121.4 | 124.6 | 122.6 | 119.7 | 114.9 | Capex / revenue % | 2.0 | 2.4 | 2.7 | 2.8 | 3.0 | 3.0 | 3.0 | 3.0 | EBIT / net interest | 4.3 | 6.3 | 8.0 | 10.7 | 11.3 | 11.6 | 11.5 | 11.3 | Dividend cover (UBS) | 10.4 | 7.7 | 5.2 | 5.0 | 4.7 | 4.6 | 4.3 | 4.0 | Div. payout ratio (UBS) % | 9.6 | 13.1 | 19.2 | 20.0 | 21.2 | 21.9 | 23.1 | 25.0 |
| | | | | | | | | Newport News | 4,382 | 4,536 | 4,700 | 4,607 | 4,505 | 4,823 | 5,042 | 5,260 | Gulf Coast | 2,441 | 2,286 | 2,201 | 2,361 | 2,450 | 2,375 | 2,350 | 2,200 | Others | (3) | 135 | 132 | 109 | 98 | 88 | 79 | 71 | Total | 6,820 | 6,957 | 7,033 | 7,077 | 7,053 | 7,286 | 7,471 | 7,532 |
| | | | | | | | | Newport News | 402 | 415 | 422 | 391 | 411 | 440 | 469 | 500 | Gulf Coast | 165 | 229 | 243 | 262 | 251 | 239 | 228 | 210 | Others | (55) | 58 | 70 | 117 | 132 | 132 | 112 | 82 | Total | 512 | 702 | 735 | 770 | 794 | 811 | 809 | 792 |
Source: Company accounts, UBS estimates. (UBS) metrics use reported figures which have been adjusted by UBS analysts. | | | | | Forecast returns | Forecast price appreciation+13.0% | Forecast dividend yield1.4% | Forecast stock return+14.4% | Market return assumption5.7% | Forecast excess return+8.7% |
| Valuation Method and Risk Statement As one of two major U.S. Naval shipbuilders, HII derives substantially all of its revenues from U.S. defense and homeland security spending. Reductions in the defense budget, or more specifically the Navy or Coast Guard’s shipbuilding budgets, could negatively impact HII’s revenues and earnings. HII competes for many of its contracts, predominantly with GD, and is therefore subject to competitive risks. Additionally, HII’s Gulf Coast shipyards in Mississippi and Louisiana are vulnerable to hurricanes, which have negatively impacted program profitability in the past and could do so again. Given its large pension plan relative to its size, HII's GAAP-reported earnings can fluctuate significantly as a result of interest rate volatility and stock market volatility.
Our price target is DCF-based. Required Disclosures This report has been prepared by UBS Securities LLC, an affiliate of UBS AG. UBS AG, its subsidiaries, branches and affiliates are referred to herein as UBS. For information on the ways in which UBS manages conflicts and maintains independence of its research product; historical performance information; and certain additional disclosures concerning UBS research recommendations, please visit www.ubs.com/disclosures. The figures contained in performance charts refer to the past; past performance is not a reliable indicator of future results. Additional information will be made available upon request. UBS Securities Co. Limited is licensed to conduct securities investment consultancy businesses by the China Securities Regulatory Commission. UBS acts or may act as principal in the debt securities (or in related derivatives) that may be the subject of this report. Analyst Certification: Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers and were prepared in an independent manner, including with respect to UBS, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report. UBS Investment Research: Global Equity Rating Definitions 12-Month Rating | Definition | Coverage | IB Services | Buy | FSR is > 6% above the MRA. | 49% | 32% | Neutral | FSR is between -6% and 6% of the MRA. | 38% | 26% | Sell | FSR is > 6% below the MRA. | 14% | 19% | Short-Term Rating | Definition | Coverage | IB Services | Buy | Stock price expected to rise within three months from the time the rating was assigned because of a specific catalyst or event. | <1% | <1% | Sell | Stock price expected to fall within three months from the time the rating was assigned because of a specific catalyst or event. | <1% | <1% |
Source: UBS. Rating allocations are as of 31 March 2016.
1:Percentage of companies under coverage globally within the 12-month rating category.
2:Percentage of companies within the 12-month rating category for which investment banking (IB) services were provided within the past 12 months.
3:Percentage of companies under coverage globally within the Short-Term rating category.
4:Percentage of companies within the Short-Term rating category for which investment banking (IB) services were provided within the past 12 months. KEY DEFINITIONS: Forecast Stock Return (FSR) is defined as expected percentage price appreciation plus gross dividend yield over the next 12 months. Market Return Assumption (MRA) is defined as the one-year local market interest rate plus 5% (a proxy for, and not a forecast of, the equity risk premium). Under Review (UR) Stocks may be flagged as UR by the analyst, indicating that the stock's price target and/or rating are subject to possible change in the near term, usually in response to an event that may affect the investment case or valuation. Short-Term Ratings reflect the expected near-term (up to three months) performance of the stock and do not reflect any change in the fundamental view or investment case. Equity Price Targets have an investment horizon of 12 months. EXCEPTIONS AND SPECIAL CASES: UK and European Investment Fund ratings and definitions are: Buy: Positive on factors such as structure, management, performance record, discount; Neutral: Neutral on factors such as structure, management, performance record, discount; Sell: Negative on factors such as structure, management, performance record, discount. Core Banding Exceptions (CBE): Exceptions to the standard +/-6% bands may be granted by the Investment Review Committee (IRC). Factors considered by the IRC include the stock's volatility and the credit spread of the respective company's debt. As a result, stocks deemed to be very high or low risk may be subject to higher or lower bands as they relate to the rating. When such exceptions apply, they will be identified in the Company Disclosures table in the relevant research piece. Research analysts contributing to this report who are employed by any non-US affiliate of UBS Securities LLC are not registered/qualified as research analysts with FINRA. Such analysts may not be associated persons of UBS Securities LLC and therefore are not subject to the FINRA restrictions on communications with a subject company, public appearances, and trading securities held by a research analyst account. The name of each affiliate and analyst employed by that affiliate contributing to this report, if any, follows. UBS Securities LLC: David E. Strauss; Darryl Genovesi; Matthew Akers, CFA. Company Disclosures Company Name | Reuters | 12-month rating | Short-term rating | Price | Price date | General Dynamics Corp. | GD.N | Buy | N/A | US$139.76 | 16 Jun 2016 | Huntington Ingalls Industries Inc | HII.N | Buy (UR) | N/A | US$159.25 | 16 Jun 2016 | Orbital ATK Inc | OA.N | Buy | N/A | US$88.37 | 16 Jun 2016 | Raytheon Co. | RTN.N | Buy | N/A | US$136.17 | 16 Jun 2016 |
Source: UBS. All prices as of local market close.
Ratings in this table are the most current published ratings prior to this report. They may be more recent than the stock pricing date 6a.This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and investment banking services are being, or have been, provided. 6b.This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and non-securities services are being, or have been, provided. 7.Within the past 12 months, UBS Securities LLC and/or its affiliates have received compensation for products and services other than investment banking services from this company/entity. 16.UBS Securities LLC makes a market in the securities and/or ADRs of this company. Unless otherwise indicated, please refer to the Valuation and Risk sections within the body of this report. For a complete set of disclosure statements associated with the companies discussed in this report, including information on valuation and risk, please contact UBS Securities LLC, 1285 Avenue of Americas, New York, NY 10019, USA, Attention: Investment Research. General Dynamics Corp. (US$) 
Source: UBS; as of 16 Jun 2016 |
Huntington Ingalls Industries Inc (US$) 
Source: UBS; as of 16 Jun 2016 |
Orbital ATK Inc (US$) 
Source: UBS; as of 16 Jun 2016 |
Raytheon Co. (US$) 
Source: UBS; as of 16 Jun 2016 |
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