Will Huntington Ingalls gain in face of USA-China crisis?

Huntington Ingallss (HII.US) is a leading designer of warships for the US Navy, alongside General Dynamics. The company was spun off in 2011 from the Ship Systems division of defense giant Northrop Grumman (NOC.US). The stock price has risen nearly 20% since July, well above the average for the US aerospace & defense sector. The company will report financial results on November 3:

• The tense situation in the Far East may persist as long as Xi Jinping leads China to global superpower status. Jinping was elected to another term as chairman of the Chinese Communist Party, stressed that Taiwan belongs to Chinese territory and hinted at the possibility of reaching out to the military to force the island, which is strategic because of its semiconductor production, into subordination. An additional crisis concerns the situation between Japan and Russia, as well as North and South Korea. The U.S. must also ensure a strategic presence around the Pacific islands and Australia;
• The U.S. is working on a 'land lease' bill that will allow Taiwan to lease U.S. military equipment over 10-year repayment periods, and has pledged to defend the island. From the positioning of the U.S. itself, it is clear that in a possible clash (which hopefully will not ultimately occur) the key role will be played primarily by the navy and secondarily by the air force;
• The two largest suppliers of warships to the US are Huntington Ingalls and General Dynamics (GD.US). Both companies are working on the Navy's flagship ships, the Arleigh Burke-class missile destroyers. Huntington received $6.17 billion in funding from the Department of Defense this year to build combat and landing ships. Since the beginning of 2022, the BlackRock fund has increased its stake in the company by nearly 25% by adding 1.062 million shares. The latest funding was for a 2-year, $23.6 million program to support the CVN-79 aircraft carrier. Huntington also remains the leading builder of state-of-the-art aircraft carriers (including the former Nimitz class), which are launched at the company's Newport News Shipbuilding shipyard. A report by GlobeNewswire analysts indicates that the CAGR for shipbuilding market orders will record a 4.5% annual growth rate through 2030;
• An even larger, nearly $21 billion contract with the U.S. Navy has been awarded to General Dynamics, a major builder of Virginia-class nuclear submarines and owner of the NASSCO division, which specializes in the design servicing and construction of warships, support ships, and tankers and transport vessels;
• A potential win by the Republicans in the midterms election could support U.S. arms manufacturers, with an emphasis on naval and aviation; currently, the Republicans are leading in elections for the lower house of Congress, the House of Representatives. The Republican Party has for many years pointed to China as a major challenging rival to the US, with a larger part of the party advocating a reduction of the US military presence in Europe at the expense of a 'move away to the Pacific'.

Huntington Ingalls (HII.US) stock, W1 interval. In August this year we saw the so-called 'golden cross' when the SMA50 average (black) crossed the 200-period average (red) from below, importantly we see this on the weekly interval, which makes a strong formation likely. The first resistance for the bulls is likely to turn out to be the 2019 (pre-pandemic) peak levels, which run around $2,800 per share. Significantly, most of the largest companies in the US arms sector have already managed to break through the 2019 peaks, potentially indicating that Huntington Ingalls is undervalued against the industry. The price-to-earnings ratio for the company is around 16.36, with a price-to-book-value ratio in the vicinity of 3.07. At the same time, however, its debt-to-asset ratio is 1.05, slightly outperforming Northrop Grumman, General Dynamics and Lockheed Martin or Raytheon Technologies (RTX.US). At the same time, Huntington Ingalls' market capitalization is nearly 6 times lower than General Dynamics, which may herald higher volatility. Source: xStation5