Russia’s invasion of Ukraine is simply not sustainable. So, the next cold war will (likely) not be with Russia but with China. Cynically, that bodes very well for naval shipbuilder Huntington Ingalls (NYSE:HII). I’ll be blunt: analysts are pensive on it, and the company falls outside the geopolitical focus. Yet, over the long run, it may be one of the most important defense contractors. Therefore, I am bullish on HII stock.
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HII Stock Benefits from the Russia Out, China In Narrative
Question: how is it possible to dismiss the Russians so easily? The answer is quite simple: a war economy is never sustainable in the long run.
Fundamentally, war doesn’t create. It’s inherently a consumptive and destructive exercise. Only completely irrational individuals disjointed from reality would argue otherwise. However, it can be profitable provided that the returns of resource acquisition and populace subjugation overcome the loss in lives and materiel. For the Russians, the latter point is problematic because the Ukrainians have demonstrated they do not want them around.
It’s true that the International Monetary Fund (IMF) stated that the Russian economy has grown and may continue to grow. I’m not disputing this fact. However, I’m surprised that few in the mainstream media have raised the counterargument: all economic activities contribute to GDP. It should be no surprise, then, that the Russian economy has grown because it’s operating a war economy.
The question is not whether growth exists or not. Rather, it’s whether this growth is ultimately accretive or consumptive.
As an example, funding educational programs is an accretive investment. One teacher, over a career, can teach thousands of students. And these students can then go on to do great things. A consumptive example is a nuclear warhead. It can never be used, and if it is, that’s probably the end of humanity.
What makes the Russian matter worse is that Ukraine is Ukraine, meaning that its borders will likely never expand. It’s a constant. So, the only variable is how many lives and resources the Russians are willing to expend. Ukraine does not get bigger and more viable just because the Russians suffer more casualties.
Therefore, as Russia’s invasion drags on, it incurs a higher cost for a prize that can never get bigger. It’s the classic sunk-cost fallacy.
Eventually, Russia’s pride and stubbornness will cause it to crumble economically. China hasn’t done anything silly yet, so it may emerge as the Western powers’ main counterpoint. That may bolster the bullish case for HII stock.
A Strong China Is Good for the Naval Defense Industry
As the largest military shipbuilding company in the U.S., Huntington Ingalls is indirectly a play on the U.S. Navy. It also builds ships for the U.S. Coast Guard. Therefore, any geopolitical conflict that involves large bodies of water will likely benefit HII stock. In other words, a strong China is good – in a very cynical sense – for the Navy. And that’s great for Huntington Ingalls.
Of course, the Chinese government has its eyes on Taiwan. In late May, China conducted military exercises near the island territory, escalating tensions. Ordinarily, a large nation bullying a much smaller one might not attract so much attention. The thing with Taiwan, of course, is that it’s home to some of the world’s most important semiconductor facilities.
If Taiwan goes under, the devastation for the world economy could be utterly catastrophic. At the same time, that has also prevented Beijing from doing something rash. It knows very well that the Navy will unleash perdition on Chinese forces if they attack Taiwan. To keep China and all other nations honest, the Navy has to project power. That’s a huge catalyst for HII stock.
Nevertheless, the Taiwan issue is a sensitive one for China. It’s undoubtedly keeping an eye on Russia, its performance, and the response from the global community. Therefore, it likely has calculated and continues to calculate the underlying cost-benefit dynamics.
What’s more, it’s almost a certainty that the U.S. is conducting strategic planning for various scenarios, including the defense of Taiwan. Almost surely, that’s another positive for HII stock. Again, American forces must keep Beijing in check.
A Surprisingly Undervalued Opportunity
Right now, HII stock trades hands at 0.85x trailing-year revenue, which is already undervalued. The Aerospace and Defense sector runs an average revenue multiple of 1.7x. Still, analysts are pensive on the idea. They’re unwilling to say it’s a Sell but not encouraged enough to say it’s a Buy.
It’s an understandable assessment, but it’s also one-dimensional. As stated earlier, Russia is heavily committed to a consumptive war economy for a fixed prize. Further, many of the smartest Russians – the ones with transferable skills – have fled the country. People who could have helped move Russia forward are instead helping develop foreign nations.
Therefore, Russia may not be the focal point geopolitically. All eyes would be on China. To keep the Chinese in check, the Americans must invest more aggressively in naval power. That makes HII stock fundamentally undervalued, not just financially.
Is Huntington Ingalls Stock a Buy, According to Analysts?
Turning to Wall Street, HII stock has a Hold consensus rating based on two Buys, two Holds, and two Sell ratings. The average HII stock price target is $286.00, implying 16.2% upside potential.
The Takeaway: Geopolitical Winds Will Likely Shift in Favor of HII Stock
With the geopolitical focus centered on Russia’s invasion of Ukraine, naval shipbuilder Huntington Ingalls doesn’t particularly seem relevant. However, the invasion will likely fail due to the consumptive nature of a war economy. That may leave China to rise as the counterpoint to the West, which ultimately bodes well for HII stock due to the need for developing advanced naval firepower.
