Policing the world doesn't come cheap...
In December 2019, President Donald Trump signed Congress' proposed $1.4 trillion spending bill for 2020.
The budget allocated $738 billion to the Department of Defense ("DOD").
The DOD can use this to buy more missiles and planes. And it will also establish a sixth armed services division dubbed the "Space Force."
But more than $700 billion a year may not be enough.
Just last week, Adm. Michael Gilday, the chief of naval operations, said the Navy needs a larger budget if it's to meet the Trump administration's goals of growing the Navy's fleet to 355 ships or more. Right now, the Navy has less than 300 ships.
And today's company will reap the rewards from a boost in Naval spending...
Huntington Ingalls (NYSE: HII) is one of three companies to build ships for the Navy – the others are General Dynamics (GD) and Lockheed Martin (LMT).
Huntington Ingalls has a monopoly when it comes to building the Navy's aircraft carriers. General Dynamics mostly builds support ships, destroyers, and submarines... not carriers.
The Navy is currently upgrading its existing carrier fleet. It's slowly retiring its Nimitz-class carriers and moving on to the new Ford-class aircraft carrier, starting with the delivery of the USS Gerald R. Ford in 2017.
The new ships come with a big price tag, too. The first cost more than $12 billion to get into the water.
And the Navy is turning to Huntington Ingalls to build the ships. Only Huntington Ingalls has the facilities, workforce, and network necessary to build them. No one else can do it.
And Huntington doesn't just build the new ships. It repairs current ones. Both the old Nimitz-class carriers and the new Ford ones have expected lives of 50 years. During that time, they have to come in for maintenance and overhauls. One round of maintenance costs $2.6 billion. Only Huntington Ingalls provides that service.
It also strips down the old ships.
When a ship is no longer fit for service, the Navy doesn't just crush it like an old car in a junkyard. It's a painstaking and costly process. It first pulls out all the equipment, tools, and spare parts. Then, it drains the fuel and hydraulic systems.
Sometimes the de-fueling equipment needs to be specialized for the ship... Huntington is the only company with the tools for the job. Starting at the end of 2012, it began work to inactivate the USS Enterprise – a $745 million project.
As the Navy's fleet gets upgraded, more of its older ships will be inactivated. Huntington will profit on both ends of the process – building the new ones and scrapping the old ones.
Put simply, Huntington Ingalls holds the monopoly on specialized ship inactivations... And it holds a virtual monopoly when it comes to building ships as well.
You see, the company doesn't just build aircraft carriers. It also builds nuclear attack submarines, the National Security Cutter fleet for the Coast Guard, amphibious assault vehicles, and Navy destroyers.
Huntington Ingalls earns nearly all its revenue from spending by the U.S. Navy and Coast Guard.
When Huntington Ingalls spun off from defense giant Northrop Grumman (NOC) in 2011, officials were concerned that its debt load and the loss of Northrop's significant financial support would be risky.
Since then, though, it has aggressively paid down that debt and strengthened its balance sheet. In 2011, Huntington Ingalls' debt represented more than three years of earnings. Today, it would take less than a year of earnings to pay off what it owes.
That's fantastic improvement.
Much of that is thanks to the spinoff...
Since then, Huntington Ingalls' management team could focus on shipbuilding and reinvesting in its business without navigating the bureaucracy of the much-larger Northrop Grumman.
This strategy is paying off.
Huntington has consistently grown its sales over the past five years. In 2018, it has recorded revenue of $8.1 billion. That's 25% higher than its sales in 2014. And its operating margins have held steady at around 11%.
The management of Huntington has top-notch credentials. And that's evident in the stock's performance.
Over the past five years, Huntington's stock is up more than 130%. That drastically outperforms the 103% gain from the iShares Aerospace and Defense Fund (ITA). And it more than doubled the return of the S&P 500 Index over the same period.
Huntington Ingalls' consistent outperformance for shareholders shows us that it's a business run right.
It has a near monopoly when it comes to naval ships. As the U.S. continues to beef up its military, Huntington Ingalls will be a key defense contractor. And that will provide a sustained tailwind for HII shares.
Sometimes investing is simple.
Our colleague Dr. David Eifrig recommended shares of Huntington Ingalls to his Retirement Millionaire subscribers in January 2017. Readers who followed his advice are sitting on gains of about 50% in three years. If you'd like to learn more about Retirement Millionaire, click here.