"A battle of the hawks is raging on Capitol Hill. Defense hawks say the nation's security will be endangered if the caps imposed under the 2011 Budget Control Act aren't lifted, allowing for more defense spending."
With those words, retired Capt. Henry (Jerry) Hendrix fired his latest salvo at his former employer, the U.S. Navy. He also raised a question of great importance to investors in the defense industry: Does Congress need to spend more on the military, such that defense contractors should expect a big boost in revenue in the near future? Or can we get by on what we already have?
The Navy, you see, already boasts a $161 billion annual budget. Hendrix's critique, though, centers more on how the Navy spends that money than on its absolute amount. He summed up his argument in the pages of the National Review in six short words:
The Navy "needs to stop building aircraft carriers."
Stranger words were never spoken
That might sound strange, coming from the pen of a former Navy aviator. Yet Hendrix argued the point well. As he sees it, the Navy has four primary problems today:
- a budget crisis
- a falling ship count
- an "atrophying" strategic position
- "marginal combat effectiveness."
All of this stems from the devotion of too many resources to building aircraft carriers, and investing in other ships and weapons systems designed to protect a carrier-centric fleet.
As Hendrix explained, a 94,000-ton Nimitz-class carrier (as pictured above) costs $5 billion to build. That's about a third of the Navy's annual shipbuilding budget. But the new 100,000-ton Gerald R. Ford-class carriers will cost $14 billion each -- nearly one full year's worth of shipbuilding dollars.
That same money, if differently deployed, could buy the Navy "seven missile-laden destroyers, or seven submarines, or 28 frigates, or 100 joint high-speed vessels," according to Hendrix. Or the Navy could mix and match, and build an entire war fleet for the cost of just one new aircraft carrier.
So how does all of this relate to the Navy's supposed budget crisis, falling ship count, strategic weakness, and diminished combat effectiveness? Consider this: If $14 billion can buy you just one aircraft carrier -- but 100 JHSVs -- then it's easy to see how a simple reallocation of funds could raise the Navy's ship count to 300, 400, or even 500 warships in just a few years.
At the same time, from an investor's perspective, growing the Navy does not necessarily mean increasing the defense budget -- or the revenue streams of America's two primary shipbuilders, General Dynamics (NYSE:GD) and Huntington Ingalls (NYSE:HII). If Hendrix's advice is heeded, the Navy could grow, even as revenue at General D and Huntington remain flat. (On the plus side, though, there would also be no need to chip away at these companies' operating profit margins, which S&P Capital IQ puts at a healthy 11% to 13%.)
Now, granted, not all warships are created equal. A frigate, destroyer, or submarine might not pack the punch of a fully fledged nuclear supercarrier. On the other hand, 100 JHSVs -- each potentially armed with a Mach 7 cannon, or even a laser cannon with infinite ammunition -- just might. And because those warships could be widely distributed, they'd be more useful at "showing the flag" missions, and at extending naval security to more points around the globe than can be reached by any one carrier group at any one time.
Opportunity and risk
Indeed, perhaps Hendrix's most damning critique of today's aircraft carriers is that they might not be as useful as we think. As he pointed out, "Americans are willing to risk their lives for important reasons, but they have also become increasingly averse to casualties." Each Ford-class aircraft carrier carries a crew of 4,800, yet is vulnerable to just one lucky strike by an opposing force.
In illustration of which, a recent Navy war game pitted U.S. Carrier Strike Group 12, including the USS Theodore Roosevelt and its several escorting cruisers, destroyers, and submarines, against a French navy Saphir-class submarine. In the course of the exercise, the French submarine simulated an attack on the group, successfully "eliminating" first the aircraft carrier, then most of its escort.
This was just a simulation, but Hendrix warned that in real life, "Losing a platform with nearly 5,000 American souls onboard would not just raise an outcry, but would undermine public faith in elected officials." As a result, it's highly unlikely the U.S. Navy would put a large aircraft carrier into harm's way in a situation where such a loss was even remotely possible -- although these are exactly the kinds of situations the carrier was designed to take on.
This, said Hendrix, "violates a core principle of war: Never introduce an element that you cannot afford to lose."
Rich Smith does not own shares of, nor is he short, any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 327 out of more than 75,000 rated members.
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