The U.S. Navy has 289 warships today, although it would like to have 306.
But the Navy also has a problem: Some of the ships it wants to build could be so expensive that it won't be able to build anything else.
The Navy's current "30-year shipbuilding plan" calls for maintaining a fleet consisting of:
- 88 large multimission surface combatants (guided missile destroyers and cruisers)
- 52 small multi-role surface combatants (these are the Littoral Combat Ships you may have heard a lot about lately)
- 48 nuclear-powered fast-attack submarines
- 33 amphibious landing ships (some of which you could even call "mini aircraft carriers")
- 33 support vessels
- 29 combat logistics force ships
- 11 full-size nuclear-powered aircraft carriers
- 4 nuclear-powered cruise missile submarines (all of which are slated for retirement over the next decade, dropping this category to "0")
- 12 ballistic missile submarines.
It's the last line item that is giving Navy accountants fits.
Giving the USS Gerald R. Ford a run for its money
The ballistic missile nuclear submarines in question, known today as SSBN(X) or Ohio Replacement Submarines, are designed to carry one leg of America's strategic nuclear triad -- water-borne nuclear missiles, as opposed to nukes on aircraft or those deployed in underground silos. SSBN(X) will replace the outgoing Ohio class of nuclear missile submarines, which currently perform the Navy's nuclear mission. Unfortunately, the price tag on these new nuclear submarines rivals the cost of America's new umpteen-billion-dollar Gerald R. Ford-class aircraft carrier.
In some ways, SSBN(X) will represent significant cost savings for American taxpayers. For one thing, the Navy says it only needs 12 of the new vessels to do the work of 14 Ohio-class boomers. That's two boatloads of money saved right off the boat (er, bat). For another, the reactors that power the SSBN(X) are designed for a 40-year life span. So these nuclear submarines will not require expensive midlife refueling halfway through their careers. That fact alone could yield savings of $40 billion over the subs' operational life.
Even so, the up-front costs on these nuclear submarines may "break the bank," preventing the Navy from building almost anything else until they're completed.
Run silent, run pricey
All together now: "How expensive is SSBN(X)?" Well, according to the Congressional Budget Office, or CBO, the very first SSBN(X) built -- before economies of scale kick in -- could set taxpayers back by as much as $13 billion. That's roughly equivalent to the Navy's entire annual shipbuilding budget today. It's also the close to the price of a full-size Ford-class carrier (exclusive of research and development costs).
Granted, as with the Ford, SSBN(X)'s $13 billion cost will be spread over a few years' construction. Also, after the first boat is built, subsequent subs should average closer to $7.7 billion each, according to the CBO. (The Navy thinks it can get them cheaper -- $6.6 billion apiece, or $79 billion total).
But even so, the Navy estimates SSBN(X) will push up shipbuilding costs across its latest 30-year plan from $14 billion-$15 billion annually to as high as $17.2 billion in years when SSBN(X) construction work is ongoing -- and perhaps even higher.
What this means for investors
So you see the Navy's dilemma. To maintain America's strategic nuclear deterrent, it must replace its aging Ohio-class nuclear missile submarines. The replacement, though, costs so much that building it won't permit building all the other ships the Navy has on its wish list.
In its the recent Report to Congress on the Annual Long-Range Plan for Construction of Naval Vessels for FY 2015, the Navy warned that it "can only afford the SSBN procurement costs with significant increases in our top-line or by having the SSBN funded from sources that do not result in any reductions to the DON's resourcing level."
Translation: It wants more money.
And that is why this one single ship class, the SSBN(X) Ohio submarine replacement, is so important to investors. In a nutshell, if the Navy gets what it wants from Congress, this will mean literally billions of dollars added to the military budget, and earmarked for the two companies that build America's submarines, Huntington Ingalls (NYSE:HII) and General Dynamics (NYSE:GD).
On the other hand, if Congress turns the Navy down, and insists it live within its means, the worst-case scenario is that SSBN(X) never gets built at all -- tens of billions of dollars subtracted from Huntington's and General D's expected future revenue streams.
For General Dynamics, which only does about $6.7 billion in Navy business annually, the fate of SSBN(X) has the potential to move the needle on revenue in a very big way -- up or down. For Huntington Ingalls, it's even more crucial. S&P Capital IQ pegs Huntington's annual revenue at $6.8 billion -- but, unlike General D, building warships is Huntington's entire business. Calling SSBN(X) a life-or-death program for Huntington might sound like exaggeration -- but really, that's exactly what it is.