One for you, two for me. $6.75 billion for you ... $9.5 billion for me.
For the longest time, the U.S. Navy has been dependent upon just two large military shipbuilders to build the bulk of its fleet: General Dynamics (GD -0.24%) and Huntington Ingalls (HII -0.73%). Essentially every submarine and destroyer in active service in the Navy today came from one of these companies. Beyond those two classes, General Dynamics also builds fuel replenishment ships and various other support vessels for the Navy, while Huntington Ingalls handles the construction of aircraft carriers and amphibious assault ships.
But while the Navy tries to divide its shipbuilding contracts between these two giant defense contractors roughly down the middle, sometimes it doesn't work out that way.
A shipbuilding duopoly for Uncle Sam
Last month, for example, the U.S. Navy awarded General Dynamics a sole-source contract to build it eight John Lewis-class fleet replenishment oilers -- vessels that refuel and resupply other ships while they are underway. All of those new oilers, hull numbers T-AO 214 through T-AO 221, are scheduled to be delivered by January 2035. The total value of that contract ran to $6.8 billion -- and Huntington Ingalls wasn't so much as asked to submit a bid on it. As the Pentagon explained in its contract announcement, "this contract was not competitively procured" -- they just handed it to General Dynamics on a silver platter.
Some Huntington Ingalls shareholders might have been a bit miffed at that, but they shouldn't have been. Just a couple of weeks later, Huntington Ingalls got two construction contracts of its own. At least one of these was also "not competitively procured," and when combined, they add up to much more money than General Dynamics will get for the oilers.
Huntington Ingall's new contracts
Valued at $5.8 billion, the first contract tasks Huntington Ingalls with designing and building 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 vessels specialize in transporting troops, landing vessels, and helicopters to theaters of conflict, there to disgorge them upon hostile shores.
Each Flight II vessel 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 assault vehicles.
Separately, Huntington Ingalls was awarded a $3.7 billion contract to begin work on building a new Flight I America-class amphibious assault ship. Also known as a landing helicopter assault ship (and LHA), this type of warship resembles a small aircraft carrier in appearance. According to Huntington Ingalls, in addition to carrying a Marine complement nearly three times as large as that on an LPD, a typical LHA might be equipped with five F-35B short take-off and landing stealth fighter jets, a dozen V-22s, a half dozen attack helicopters, and a half dozen search and rescue and transport helicopters.
What it means to investors
Armaments aside, what's most interesting about these contracts to investors is the fact that, combined, Huntington Ingalls has just been awarded contracts worth about 50% more than those that 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 businesses operating on land, air, and sea. This magnifies the importance of a large contract win for a (relatively) small company.
Huntington Ingalls carries a market capitalization of just $10.2 billion -- a small fraction of General Dynamics' $83.4 billion-plus market cap. What's more, Huntington Ingalls' has $11.8 billion in annual revenue, which makes it comfortably cheaper than my usual target valuation for defense contractors of 1.0 times sales. Huntington Ingalls is, in fact, valued at a bit less than 0.9 times sales -- while General Dynamics today has a valuation of 1.9 times sales.
And now, in a single day, Huntington Ingalls has gained contracts worth nearly a full year of revenue.
Suffice it to say that, when evaluating defense stocks for future investment, Huntington Ingalls stock just moved to the top of my list. I've got nothing to say against General Dynamics as a company, but HII stock just looks like a better value to me.
