Military shipbuilder Huntington Ingalls Inc.’s (HII - Free Report) business segment, Newport News, recently clinched a modification contract worth $105 million, for upgrading nuclear submarines. Work related to the deal is scheduled to be over by September 2019.
Details of the Deal
The contract has been awarded by the Naval Sea Systems Command, Washington, D.C. Per the terms of the agreement, Huntington will provide engineering, technical, design, configuration and database management as well as integrated logistics support for the ships. In addition, the company will also offer research and development, modernization and industrial support for submarines.
The modification related task will be executed at the Newport News shipyard, located in Virginia. Huntington aims to utilize fiscal 2017 other procurement, fiscal 2017 research, development, test and evaluation as well as fiscal 2015 shipbuilding and conversion funds to complete the project.
Nuclear Submarines And the United States
To counter the rising geopolitical tensions across the world, the U.S. government has been designing submarines for decades. In 1954, the U.S. Navy was the first to launch a nuclear-powered submarine. These submarines were markedly better than the diesel-engine ones that had to make multiple stops for refueling. Currently the Navy has three classes of nuclear-powered attack submarines — Virginia-class, Ohio-class and Los Angeles-class.
Notably, in the United States, the market for nuclear submarine is a consolidated one, operated by two prime players — Huntington and General Dynamics Corporation (GD - Free Report) . As a result both the companies enjoy a large share of the market as well as high profit margins.
It is imperative to mention in this context that recently the U.S. administration has been allotting significant provision for nuclear submarines in the nation’s defense budget, thereby encouraging submarine-manufacturers in boosting their production. Evidently, the fiscal 2017 budget proposal allocated $8.1 billion for submarines.
How the Deal Will Benefit Huntington?
Huntington’s Newport News division enjoys one of the leading positions in the designing and building nuclear-powered submarines for the U.S. Navy. As of December 2016, Newport News delivered 59 submarines to the U.S. Navy which comprised 45 fast attack and 14 ballistic missile submarines. Moreover, of the 52 nuclear-powered fast attack submarines currently in active service, 25 were delivered by Newport News.
Of late, the U.S. Navy has committed to design the Columbia class submarine as a replacement of the currently aging Ohio class nuclear ballistic missile submarines. The Ohio class SSBN includes 14 nuclear ballistic missile submarines and four nuclear cruise missile submarines. The Columbia class program currently has 12 ballistic missile submarines. The U.S. Navy has initiated the design process for the new class of submarines, and in early 2017 the program has entered into the engineering and manufacturing development phase. As a subcontractor, Huntington will support General Dynamics to build modules for the entire Columbia class submarine program, with the first ship’s construction expected to begin in 2021. To this end, management at Huntington believes the Columbia class submarines hold significant growth opportunity for the company, in the days ahead.
The global submarine market is expected to grow at a CAGR of 5% to reach a value of $27.6 billion from 2016 to 2021, as forecasted by Technavio market research analysts. Considering this and the aforementioned developments, we can expect Huntington to win more such submarine-related contracts going ahead, thereby boosting its profit margin.
Shares of Huntington have rallied 28.2% in the last year, underperforming the industry’s 37% gain. This could be because of the earlier budget cuts which have put pressure on the top line. Also, budget deficits and political uncertainty might make future defense budgets vulnerable to cutbacks. As a result, the company's performance lagged the likes of The Boeing Company (BA - Free Report) and Airbus Group SE (EADSY - Free Report) that outperformed the industry.
Huntington currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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