Shipbuilding Remains a Priority for the US Navy, Supporting Huntington Ingalls' Franchise

Regulated margins, mature markets, customer-paid research and development, and long-term revenue visibility allow defense contractors to deliver a lot of cash to shareholders, which makes up for relatively slow growth in this industry. Defense budgets usually ebb and flow with a nation's wealth and its perception of danger: in the US and among its allies both have been on the rise, and geopolitics is leading to larger military budgets than we've seen for decades. For perspective, we estimate that the portions of the US defense budget relevant to Huntington Ingalls and its peers shrank in 2011-16 by 3.7% while they grew in 2017-24 by 5.8%, annualized. We think the contracting budget will continue to grow with modernization in the near term but moderate to around 2.5%-3.0% over the next five years.