During an eventful presidential campaign, Donald Trump announced that he would seek to increase the number of US Navy ships to 350, up from the current level of 274. One month after President Trump was elected, the Secretary of the Navy unveiled the service's 2016 Force Structure Assessment, which called for a 355-ship Navy. Huntington Ingalls (NYSE:HII), which was a shipbuilding subsidiary of Northrop Grumman (NYSE:NOC) until a 2011 spinoff, will greatly benefit from the Navy's upcoming build-up. The stock is likely to outperform given the additional demand for Navy ships and its partnership with General Dynamics (NYSE:GD) to build a new ballistic missile submarine, the Columbia-class.
Increased Shipbuilding Is Necessary
The Navy does not currently have enough surface ships to meet its global commitments. There have been several instances where the Navy has not maintained an aircraft carrier presence in the Persian Gulf, with the most recent occurrence in December 2016. As the Middle East is an area with current military operations, it is vital to maintain a carrier presence to support ongoing missions on the ground. This 'carrier-gap' is a symptom of the Navy not having enough assets to fulfill its mission. Huntington Ingalls' Newport News shipyard is currently constructing the new USS Ford aircraft carrier, the first carrier in the Ford-class series. As a premier shipyard company, Huntington Ingalls has built nearly 70% of the Navy's active warships. The Arleigh Burke-class destroyer, the San Antonio-class amphibious assault ship, and the America-class amphibious assault ship were all built by the company today known as Huntington Ingalls.
Troubled Littoral Combat Ship Program May Be Scuttled
The two classes of the Littoral Combat Ship, the Freedom-class and the Independence-class, built by Lockheed Martin (NYSE:LMT) and General Dynamics respectively, have been plagued by cost overruns and maintenance issues. Built to conduct high speed operations close to shore, the hull of the LCS is made out of aluminum. Each Littoral Combat Ship costs as much as $478 million per unit and the beleaguered vessel has its share of critics on Capitol Hill. If the LCS program were to be scrapped completely, the Navy may need to build additional legacy ships, like the Huntington Ingalls' Arleigh Burke-class destroyer. The Pentagon's director of operational testing, Michael Gilmore, said, "the minor modifications to the LCS will not yield a ship that is significantly more survivable." I think there is a good possibility that the LCS program is dead in the water and the Navy will not procure any additional LCS vessels.
Columbia-Class Ballistic Missile Submarine
The Columbia-class ballistic missile submarine (SSBN) is scheduled to replace the aging Ohio-class submarine as the country's undersea nuclear deterrent. Currently, the Navy plans on building 12 Columbia-class nuclear submarines to replace the existing Ohio-class SSBNs. The 2017 NDAA fully funds the Ohio Replacement Program with $1.9 billion earmarked specifically for the development of the Columbia-class. General Dynamic's Electric Boat division will construct the majority of the submarine, while Huntington Ingalls' Newport News Shipbuilding subsidiary will manufacture much of the submarine's exterior as depicted below. Construction of the USS Columbia is scheduled to begin in 2021. After the completion of the first submarine, each of the following Columbia-class subs is estimated to cost between $4.9 and $5.2 billion.
Trump May Push To Reverse The Pentagon's Spending Caps
During his campaign, President Trump said he would boost military spending and reverse the budgetary caps currently imposed on the Pentagon. With the Republicans controlling Congress and the White House, I think the defense sequester will be repealed given the need for more ships and aircraft. Without the spending controls in place, the defense budget is likely to rise substantially in the coming years. On January 27th, the President ordered the Secretary of Defense to conduct a review of the military's current state of readiness. The readiness review may lead to additional shipyard repair periods for Navy ships, a move which would benefit Huntington Ingalls' shipyard business.
In summary, I think Huntington Ingalls will benefit from increased shipbuilding under the Trump administration. With such an ambitious plan for the Navy, the Pentagon will need to rely on Huntington Ingalls to build and service additional ships in the coming years. While competitors' ships like the Littoral Combat Ship are constantly in the news for maintenance failures, HII continues to deliver reliable ships like the America-class amphibious assault ship and the Arleigh Burke-class destroyer. As Huntington Ingalls has built nearly 70% of the Navy's active ships, I think HII will be a primary beneficiary of the coming naval build-up. Construction of the Columbia-class submarine will start in 2021 and this program will help drive the company's revenue over the next decade. Finally, Congress will likely remove the Pentagon's spending caps this year and I anticipate that military spending will increase for the next several years.
Disclosure: I am/we are long LMT.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.