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From new aircraft carriers to submarines to support ships, the U.S. Navy is on a buying binge that will cost $28.9 billion a year from now until 2048.
And the best stock to buy to profit from this massive investment is the nation's No. 1 builder of U.S. Navy vessels - Huntington Ingalls Industries Inc. (NYSE: HII). Not surprisingly, this premier defense stock also sports a perfect Money Morning Stock VQScore™ of 4.75.
The company, a wholly owned subsidiary of Northrop Grumman Corp. (NYSE: NOC), which was spun off from its parent in 2011, builds or contributes to the building of almost every type of naval vessel.
In fact, Huntington Ingalls says it has built 70% of the U.S. Navy's current fleet.
The Navy would like to grow its fleet from about 287 ships now to 355 ships. To do that, the Navy has accelerated its shipbuilding plans for the next several decades, which will keep Huntington Ingalls' shipyards very busy...
The Navy's Needs Make Huntington Ingalls a Best Stock to Buy
The Navy's 2019 shipbuilding plan, which covers the period from 2019 through 2048, calls for increases in several fleet categories over the 2017 plan:
- One additional aircraft carrier
- Five additional large payload submarines
- 16 additional attack submarines
- 10 additional large surface combatants (such as destroyers)
- Five additional amphibious warfare ships
The Congressional Budget Office (CBO) estimates the expanded shipbuilding will result in annual costs of $28.9 billion - an increase in Navy outlays of $3.3 billion per year above the 2017 plan.
And Huntington Ingalls is already reaping the benefits. In January, it won a $15.2 billion contract to build two Ford-class nuclear-powered aircraft carriers - the U.S.S. Enterprise (CVN 80) and the as-yet-unnamed CVN 81 - at its Newport News, Va., facility. Huntington Ingalls is the only contractor that builds carriers.
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Other Navy orders, including a $5.1 billion contract for six additional Arleigh Burke-class destroyers awarded in Sept. 2018, resulted in a $23 billion backlog as of the end of last year. Just weeks after the fourth quarter ended, the contract for the two new carriers grew that figure to $38 billion.
Also not to be overlooked is Huntington Ingalls' Technical Services division, which the company has been growing through acquisitions since 2016. This group does fleet maintenance and modernization, software development and network engineering, logistics support, and nuclear engineering and fabrication.
Technical services is another promising source of growth for HII. The division contributed 5% of operating income in 2018 versus 1% in 2016.
For investors seeking a company with a stable business, it's hard to beat Huntington Ingalls. The contracts run for multiple years, with new contracts added to meet the Navy's needs.
Even budget cutbacks seem unlikely to affect HII, as geopolitical shifts have given lawmakers a powerful incentive to build up the Navy and keep it strong...
The Challenge from China Means Steady Business for HII
While the United States spent the past 20 years preoccupied with terrorist organizations operating out of the Middle East, China has been building up its naval capabilities to exert control over areas such as the Taiwan Strait and the South China Sea.
In 2017, the Chinese Navy surpassed the U.S. Navy in numbers of ships, although the United States retains a qualitative advantage. Over the past six years, China has shifted resources from its army to its navy, which has included not just a growing number of vessels, but also anti-ship ballistic missiles.
China already has two aircraft carriers (no other country besides the United States has more than one) and is believed to want five or six. A third is currently under construction.
Emboldened Chinese leaders have even threatened the United States. In December, Rear Admiral Lou Yuan boasted about the capabilities of his nation's anti-ship missiles, suggesting that the sinking of two U.S. carriers would "resolve" the dispute over the South China Sea.
China's increasingly potent navy means the United States will have little choice but to keep building more ships or risk losing influence in the Pacific region.
That all but assures a robust business for Huntington Ingalls for decades to come - making it ideal for investors seeking stable, steady returns.
Here's the outlook by the numbers for Huntington Ingalls stock...
Why This Defense Stock Is Undervalued Right Now
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HII has been a little beaten up over the past six months on concerns about pension funding and some hiccups in its Virginia-class sub production. But the company has moved to address those problems, and in the last quarter alone added $3.3 billion in new contracts. Down nearly 20% since reaching $261.28 on Oct. 5, the stock is a bargain now.
The price/earnings (P/E) ratio is just 11, well below its five-year average of 16.83. It's also below the P/E ratios of peers like General Dynamics Corp. (NYSE: GD), which has a P/E of 15.13, and Lockheed Martin Corp. (NYSE: LMT), which has a P/E of 17.56.
And of course, I already mentioned the VQScore of 4.75, which is a great tool for identifying undervalued stocks.
Huntington Ingalls is also a stock that, thanks to the nature of its business, delivers solid gains over long periods - qualities well suited for a retirement portfolio.
The three-year total return (which includes the 1.6% dividend) for Huntington Ingalls is 67.3%, compared to a total return of 44.8% for the S&P 500.
The company's five-year total return is even more impressive. HII delivered returns of 121.5%, compared to 50.4% for the S&P 500.
And the Navy's ambitious shipbuilding plans suggest we'll see more of the same in the years ahead.
According to Yahoo Finance, the one-year consensus target for HII stock is $247.77, a nearly 18% gain from the current price of about $210 and a total gain of 19.62% including the $3.44 dividend. That's higher than its three-year total return average of about 15%.
And it's higher than the typical return of many blue-chip stocks. Over the past year, the total return for Walt Disney Co. (NYSE: DIS) was 11.13%, for Walmart Inc. (NYSE: WMT) it was 12.6%, and for Johnson & Johnson (NYSE: JNJ) it was 8%.
Huntington Ingalls is definitely a stock that deserves to be on your radar screen.
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About the Author
David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.