Huntington Ingalls' Wide Moat Shipbuilding Capabilities Remain Indispensable to the US Navy

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 Industries 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 in the near term with modernization and robust demand reflected in the 2026 and 2027 budgets but should moderate to around 2.5%-3.0% over the next five years.