Call Invite: Navy Shipbuilding Pressures and Their Impacts on HII, GD 3 PM 9/23/2020

JOIN US FOR A SKYPE CALL ON WEDNESDAY, 23 SEPTEMBER AT 3 PM EDT

As we discussed in our last two notes, "Navy's Shipbuilding Plan Is Not Executable; Major Changes Coming" and "Navy Shipbuilding II: Is The Chinese 30 Year Plan Better Than Ours?", the plans that drive the nation's shipbuilding industry are troubled:  

• The US Navy's current goal of 355 ships may be achieved numerically in 2034 but the current plan doesn't achieve the desired mix of ship classes and total capability until after 2050. 
• Despite deep bipartisan Congressional support for shipbuilding, CBO estimates that the Navy's plan is under-resourced by 31%.  Congress adds billions to the Navy's request every year but progress has been, at best, fitful.  
• Meanwhile, the Chinese Navy (known as PLAN) has made remarkable progress in the first 20 years of its 50 year plan to becoming equal to or superior to the US Navy by 2049.  Based on China's status as the world's leader in shipbuilding (by tonnage), the rate of improvement in numbers and the quality of the PLAN is increasing year over year. 
• Given China's ballistic and hypersonic missile threats, the very composition of the future US Navy is under scrutiny.

Rarely has the urgency of getting an executable US shipbuilding plan been more acute. There is unanimity in Washington of the need for a realistic and effective plan.   We believe that, in the end, Navy shipbuilding accounts will get more resources even in a tightening defense budget environment.

UPDATE: In fact, SecDef Esper stated last week (after my notes) that shipbuilding accounts need to average 12 to 13% of the Navy budget vice the current 10 to 11% - this could mean an additional $3.4B to $5.3B annually. 

After a brief review of the status of the Navy's 30-year plan, our call will discuss what all this means for HII and GD.   A snapshot of percentage change YTD of the stock prices of HII (blue), GD (red) and the S&P (black) is fairly compelling.  HII is down over 40% YTD while GD, which is more diversified, is down 18%.  Meanwhile the S&P is up ~4%.