Huntington Ingalls (NYSE:HII) stock looks well-positioned to rise against a backdrop of heightened geopolitical tensions in which America’s naval power is coming increasingly into focus. The Virginia-based company is the largest independent military shipbuilder in the United States, manufacturing nuclear-powered aircraft carriers and submarines, amphibious warfare ships, unmanned vessels, and other types of military ships and vessels used by the U.S. Navy in warfare.
I’m bullish on Huntington Ingalls based on its leading position in this strategically important industry and its modest valuation.
Submarine Fleet Takes Center Stage amid Tensions in the Pacific
During the Republican presidential debate in Miami, candidate Chris Christie spoke of the need to bolster the U.S.’s nuclear submarine fleet in order to project strength and counter what he called rising aggression from China in the South China Sea and the Pacific.
Christie called U.S. Navy nuclear submarines “the greatest deterrent to Chinese aggression” and said that they are “the first place [he] would go to increase American naval power.” Christie also said that the U.S. needs to “drastically” increase the size of its nuclear submarine fleet, which should be music to the ears of Huntington Ingalls shareholders.
While Christie is certainly not the frontrunner to win the nomination, his point is resonant. Whoever becomes the next President of the United States will likely have to deal with rising tensions in the Pacific. The Council for Foreign Relations’ Global Conflict Tracker classifies territorial disputes in the South China Sea as having a “critical” impact on the U.S. It also classifies a potential confrontation over Taiwan as “critical” and the status of this conflict as “worsening.”
The Pentagon recently reported that China launched its first nuclear-powered guided missile submarine, which it said “notably” increases China’s “power projection capability.” The Pentagon also recently announced that an American submarine with nuclear missile capabilities was on its way to the Middle East, so the use of submarines is clearly a point of strategic focus well beyond the Pacific as well.
The Department of Defense has long spoken of the need to increase the United States’ overall military capabilities. The U.S. now trails China for the title of the largest naval fleet in the world, with under 300 warships versus about 340 for China. Huntington Ingalls is the largest independent military shipbuilder in the U.S., so if the U.S. wants to catch up with China and project strength in the Pacific and beyond, its services will be in high demand for the foreseeable future.
A Significant Moat
In addition to the potential for sustained demand as a result of these tensions, few other companies are viable competitors for this business.
Because of the technical complexity of the products, defense stocks like Huntington Ingalls enjoy significant moats around their businesses. While it doesn’t take much upfront investment or regulatory expertise to set up shop as a new SAAS company, the barriers to entry for coming in as a new defense company are much higher. Business cycles in this industry are long, and the Department of Defense is a relatively stable customer, giving incumbents like Huntington Ingalls a significant advantage.
Valuation and Dividend
Huntington Ingalls will be the long-term beneficiary from this renewed prioritization of America’s naval and submarine fleet, and the stock is attractive from a valuation standpoint, trading at just 15.7 times 2023 earnings estimates. It looks even cheaper going forward, trading at just 13.6 times 2024 earnings estimates.
This is an undemanding valuation for a company with a strong moat operating in a business with high barriers to entry. It’s also a decent discount to the S&P 500’s (SPX) average price-to-earnings multiple of about 19.5.
In addition to this attractive valuation, Huntington Ingalls also pays a dividend and currently yields 2.1%. While this isn’t a massive dividend, it’s higher than the average yield for the S&P 500 (1.6%) and helps to boost total returns over time.
Is HII Stock a Buy, According to Analysts?
Turning to Wall Street, HII earns a Moderate Buy consensus rating based on three Buys, two Holds, and one Sell rating assigned in the past three months. The average HII stock price target of $240.17 implies 5.3% upside potential.
Looking Ahead
Huntington Ingalls looks poised for growth for years to come, thanks to the increasing focus on the size and capabilities of the U.S. naval fleet. Recent global events and discussions, including those at the Republican Presidential debate, underscore the importance of bolstering the U.S.’s submarine fleet for national security reasons. Asserting naval power, particularly in the Pacific Ocean and the South China Sea, to prevent possible conflicts with China remains a major priority.
As the largest independent military shipbuilder in the United States, Huntington Ingalls is uniquely well-positioned to focus on this resurgent strategic emphasis, and the stock trades at an attractive valuation while paying a solid dividend, making it highly attractive.
