Huntington Ingalls receives $9.5 billion in orders for new Navy ships

One for you, two for me. $6.75 billion for you… $9.5 billion for me.

The US Navy has long depended on just two major military shipbuilders to build the majority of its fleet: General dynamics (NYSE:GD) And Huntington Ingalls (NYSE: HII). Essentially every submarine and destroyer in active service in the Navy today came from one of these companies. In addition to these two classes, General Dynamics also builds fuel supply ships and various other support ships for the Navy, while Huntington Ingalls handles the construction of aircraft carriers and amphibious assault ships.

But while the Navy tries to split its shipbuilding contracts roughly down the middle between these two giant defense companies, sometimes things don’t work out that way.

A shipbuilding duopoly for Uncle Sam

Last month, for example, the U.S. Navy awarded General Dynamics a contract to build eight John Lewis-class fleet replenishment oilers — ships that fuel and resupply other ships while they’re underway. All these new oil tankers, with hull numbers T-AO 214 to T-AO 221, are expected to be delivered in January 2035. The total value of that contract was $6.8 billion – and Huntington Ingalls wasn’t asked to do that much. make an offer on it. As the Pentagon explained in its contract announcement, “This contract was not negotiated in a competitive manner”; they simply handed it to General Dynamics on a silver platter.

Some Huntington Ingalls shareholders may have been a little miffed about that, but that shouldn’t have been the case. Just a few weeks later, Huntington Ingalls was awarded two construction contracts of its own. At least one of these was also “not competitively sourced,” and together they generate far more money than General Dynamics will get for the oil companies.

Huntington Ingall’s new contracts

The first contract, valued at $5.8 billion, directs Huntington Ingalls to design and build three “Flight II” amphibious transport dock ships for the Navy, with hull numbers LPD 33, LPD 34 and LPD 35. Also known as landing platform docks (hence the “LPD” designation), these ships specialize in transporting troops, landing craft, and helicopters to hot spots of conflict, only to blow them out on hostile shores.

Each Flight II ship will be able to carry hundreds of Marines and their equipment, along with a combination of up to four helicopters or V-22 Osprey vertical take-off and landing aircraft, as well as a combination of up to two “LCAC” landing hovercraft and/or up to 14 amphibious attack vehicles.

In addition, Huntington Ingalls was awarded a $3.7 billion contract to begin construction of a new Flight I America-class amphibious assault ship. This type of warship, also known as a landing helicopter attack ship (and LHA), is similar in appearance to a small aircraft carrier. According to Huntington Ingalls, in addition to carrying a Marine complement nearly three times the size of an LPD, a typical LHA might be equipped with five F-35B short-takeoff and landing stealth fighter jets, a dozen V- 22’s, half a dozen attack helicopters and half a dozen search, rescue and transport helicopters.

What it means for investors

Aside from the armaments, the most interesting thing about these contracts for investors is the fact that Huntington Ingalls just got contracts worth about 50% more than the contracts General Dynamics won two weeks earlier.

That alone sounds pretty good, but the news gets even better when you realize that Huntington Ingalls is a much smaller (and more maritime-focused) company than General Dynamics, which is more of a defense contracting conglomerate, with companies operating on land and in the air active. , and sea. This increases the importance of winning a large contract for a (relatively) small company.

Huntington Ingalls has a market cap of just $10.2 billion – a small fraction of General Dynamics’ market cap of more than $83.4 billion. Furthermore, Huntington Ingalls has annual revenues of $11.8 billion, making it comfortably cheaper than my usual target defense contractor valuation of 1.0 times revenue. In fact, Huntington Ingalls is valued at just under 0.9 times sales, while General Dynamics today has a valuation of 1.9 times sales.

And now, in one day, Huntington Ingalls has won contracts worth almost an entire year’s worth of revenue.

Suffice to say, when assessing defense stocks for future investments, Huntington Ingalls stock just rose to the top of my list. I have nothing to say against General Dynamics as a company, but HII stock just seems like a better value to me.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.