2 Defense Contractors the Pentagon Keeps Calling On in the Iran War Era -- and What They Could Mean for 2030‑Focused Investors

On April 8, six weeks of war in Iran and the Persian Gulf morphed into two weeks of ceasefire -- extended indefinitely on Tuesday by President Donald Trump until "discussions are concluded." Under the administration of a president who famously campaigned on a promise not to start wars, the Iran war appears to be entering into a new phase of not peace, not war, but...naval blockade.

Two major U.S. defense contractors are key to that effort.

Image source: Getty Images.

Huntington Ingalls Industries

Enforcing a naval blockade against a belligerent nation obviously requires naval warships to interdict maritime traffic and, when necessary, to sink or seize vessels that try to run the blockade. America has two dominant military shipbuilders supplying the Navy with warships: Huntington Ingalls Industries (NYSE: HII) and General Dynamics (NYSE: GD).

Of the two, Huntington Ingalls Industries is by far the smaller company. According to the latest data from S&P Global Market Intelligence, HII is valued at just under $15 billion, with $12.5 billion in annual revenue and $801 million in trailing-12-month profit. (General Dynamics is much larger, at $88 billion in market capitalization, $52.6 billion in sales, and $4.2 billion in profit).

And yet, size can be deceiving. Boston Consulting Group notes, for example, that Huntington Ingalls is responsible for building approximately 70% of the U.S. Navy fleet. Granted, this percentage is measured by tonnage afloat -- and HII builds all of the Navy's nuclear aircraft carriers, as well as about half its submarines, and a variety of other vessels including amphibious landing ships (LPDs, LHAs, and LHDs), national security cutters for the Coast Guard, and certain uncrewed underwater and surface vehicles (UUVs and USVs).

Measuring by tonnage, the consulting firm calls Huntington Ingalls "dominant" as a naval shipbuilder. That's saying something.

General Dynamics

General Dynamics builds the other half of the U.S. Navy submarine fleet, as well as most of the Navy's Arleigh Burke-class destroyers. The three supersized destroyers of the Zumwalt class, now discontinued but still in service, also came out of General Dynamics' Bath Iron Works. Likewise, the Navy's Ticonderoga-class guided missile cruisers (which are aging and due for retirement).

Between Huntington Ingalls' aircraft carriers and General Dynamics' destroyers (and the submarines presumably lurking nearby, protecting the blockade fleet, built by both companies), it's inconceivable that America could institute or maintain a naval blockade on Iran without the help of these two companies.

Why to invest in Huntington Ingalls and General Dynamics

From an investor's perspective, both stocks have merit. Valued based on trailing-12-month earnings, they trade at 24 times earnings for Huntington Ingalls, and 21 times for General Dynamics -- significantly below the average price-to-earnings (P/E) multiple of 30 for the S&P 500. Strong free cash flow (FCF) generation results in attractive multiples there as well, and indicates high quality of reported earnings. Valued based on price to FCF, Huntington becomes the cheaper choice with a P/FCF multiple of 18, while General Dynamics gets only a little more expensive at a P/FCF of 22.

Finally, for dividend investors, Huntington's current 1.5% dividend yield matches the average yield of the S&P 500; General Dynamics' yield of 2% beats it.

On growth, the advantage shifts back to Huntington Ingalls, with analysts forecasting an average of 15% earnings growth over the next five years, versus 7% for General Dynamics.

And I suspect investors can have confidence that these stocks will grow at or above expectations. These companies' products have proven indispensable for conducting the ongoing naval blockade of Iran, which would argue only for their prospects holding steady as the Navy maintains its current capabilities. In fact, the Navy had clearly telegraphed its intention to expand the fleet and buy even more ships from Huntington Ingalls and General Dynamics.

Presently sized at just 293 "battle force ships," the U.S. Navy is currently starting a five-year plan that should see the fleet grow to 300 ships by 2030, including delivery of the first new Columbia-class ballistic missile submarine, according to the Congressional Budget Office. After 2030, this plan will kick into high gear; the Pentagon will invest $1 trillion as the Navy phases out old hulls and buys 364 new ships over the next 30 years, growing the combined battle fleet to 381 ships.

A savvy investor might want to buy into these stocks before 2030 rolls around, and the Navy's plan becomes too obvious for Wall Street to miss.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.