Despite the Uncertainty of the Federal Budget, Navy Shipbuilding Continues

While many defense project budgets have suffered drastic program reductions, shipbuilding has not been one of them.

Mar 10, 2014 at 12:25PM

Defense contractors have taken a hit with recent budget fluctuations due to sequestration. While many defense project budgets have suffered drastic program reductions, shipbuilding has not been one of them. Recently, the U.S. Navy has submitted its 30-year plan to Congress that outlines the future of ship procurement.

One driving force is increased defense spending by China to approximately $166 billion in 2012. The BBC reported that from 2003 to 2012 China had increased its defense spending by approximately 175%. Regionally, this is a huge increase; by comparison, using the same time period, the U.S. spent $682 billion with an increase of 32%, and Japan hit $59.3 billion with a decrease of 3.6%. Japan is proposing to increase spending by 2.6% to approximately $232 billion over the next five years. Retired Japanese Navy Admiral Yoji Koda estimates that the Chinese Navy will need 15 years to reach an operational capacity that will pose a threat to the Japanese and U.S navies.

Who is building?
Two large defense industrial contractors are at the center of this growth. General Dynamics (NYSE:GD) and Lockheed Martin (NYSE:LMT) both have signed contracts with the U.S. Department of Defense to produce over 50 ships of varying classes. Many of these contracts go beyond 2020, which suggests to investors that General Dynamics and Lockheed are very attractive and stable.

The primary ships being built are the Littoral Combat Ship, or LCS, and the Joint High Speed Vessel, or JHSV. Lockheed and General Dynamics are prime for much of the LCS program. The Navy has plans to contract 52 LCS by 2026. Current Pentagon budget projections are limiting the Navy to 32 LCS. The total cost for the program is estimated at $32 billion.

The Navy plans on purchasing 24 LCS by the end of fiscal year 2015. The next allotment of ships is planned to be purchased in 2016. Investors should note that given the political nature of defense budgets, fluctuations are to be expected.

According to a recent Navy Times article, sea trials have been favorable for the JHSV. The Navy plans on purchasing 10 ships at an estimated cost of $1.6 billion. The JHSV is being built primarily in the Austal USA (NASDAQOTH:AUTLY) shipyards located in Mobile, Ala. Austal is a shipbuilder that specializes in the building of high-speed ships for both commercial and defense applications using revolutionary designs. 

Investors take note
Investing in the defense industry can be risky. One strategy to mitigate that risk is to invest in large capital projects that play a crucial role in the service's direct strategy. The Navy needs ships, and therefore shipbuilding will be done. The recent Navy 30-year plan proposes a robust building program.

The Navy is modernizing through a concerted building program, and it looks as though both the LCS and the JHVS will play large roles in naval strategy. The robust building program of China's Navy will also serve as a partial budget justification for the Navy to continue purchasing ships. Long-term-capital projects often provide a steady return on investment, especially when there is budget justification.

Warren Buffett didn't make billions by betting on half-baked stocks
He isolated his best few ideas, bet big, and rode them to riches, hardly ever selling. You deserve the same. That's why our CEO, legendary investor Tom Gardner, has permitted us to reveal "The Motley Fool's 3 Stocks to Own Forever." These picks are free today! Just click here now to uncover the three companies we love. 

Fool contributor Andrew Foote has no position in any stocks mentioned. The Motley Fool owns shares of General Dynamics and Lockheed Martin. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers