In just a few weeks, the nuclear aircraft carrier USS Gerald R. Ford (CVN 78) will begin its sea trials, in preparation for Huntington Ingalls (NYSE:HII) officially "delivering" it to the U.S. Navy in September. Once that happens, Ford will become the single biggest warship in active service -- in the world.
But it won't be the only "biggest warship."
One down, three to go
Last year, the U.S. Department of Defense awarded Huntington Ingalls $4.3 billion worth of contracts to continue work on Ford's sister ship, the USS John F. Kennedy (CVN 79), en route to an ultimate projected cost of $11.5 billion. (For context, that's actually good news. Ford itself is expected to cost $12.9 billion.)
Meanwhile, before either the Ford or the Kennedy begins service, we just got our first clue that Huntington will be authorized to begin work on the third aircraft carrier in the four-ship Ford-class production run: USS Enterprise (CVN 80).
On Monday May 23, the Pentagon awarded Huntington Ingalls $152 million "for initial advance procurement efforts in support of the fiscal 2018 detail design and construction" work on Enterprise, to include "design, research and development, engineering, and procurement of long lead time materials." This is something short of an official green light to begin construction. But Huntington has been given the go-ahead to at least begin planning Enterprise's construction -- and it's been given some spending money to begin buying parts as well.
What this means for investors
Huntington Ingalls, notes the Pentagon, "is the nation's only designer and builder of nuclear powered aircraft carriers" -- and carriers are a big part of Huntington Ingalls' business model. According to Government Accountability Office statistics, the unit cost on each Ford-class carrier is expected to average $12.1 billion. Building all four planned Ford-class flattops, therefore, will ultimately yield more than $48 billion in revenue for Huntington Ingalls -- more than six-and-a-half times Huntington's annual revenue stream.
Now mind you, this is not the most profitable work that Huntington Ingalls could be doing. In fact, last year, the company's Ingalls Shipbuilding division (which builds conventionally powered warships, such as destroyers and amphibious assault ships) earned operating profit margins nearly twice as high as the 9% margins that the Newport News division (which builds the aircraft carriers) earns on its aircraft carrier revenues. But even so, every time Huntington lands a carrier contract, it wins enough business to keep itself fully employed for the next 20 months.
And judging by the down payment the Navy just made on the USS Enterprise, it looks pretty likely that a new carrier contract should be arriving any day now.
Rich Smith does not own shares of, nor is he short, any company named above. You can find him on Motley Fool CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 299 out of more than 75,000 rated members. Follow him on Facebook for the latest in defense news.
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