American Submarine Demand Spikes

This past May, the U.S. Navy announced a record $17.645 billion contract to build 10 new Virginia-class nuclear-powered attack submarines.

To those who haven’t seen The Hunt for Red October, a nuclear attack submarine is a fast, quiet hunter, designed to stalk and destroy other submarines and surface ships.

Ballistic missile submarines are larger ships whose role is to hide and maintain a state of eternal readiness and, if ordered, to fire their long-range, nuclear-tipped missiles at a moment’s notice.

The multi-year contract for 10 of these ultra-modern attack subs provides for two ships per year over the five-year period, with each of the two selected shipbuilding contractors delivering one sub per year.

The two shipbuilders will contribute equally in a team effort to build the subs, with each yard responsible for certain portions of each hull.

“The Block IV award is the largest shipbuilding contract in US Navy history in terms of total dollar value,” said Rear Adm. Dave Johnson, program executive officer for submarines at Naval Sea Systems Command (NAVSEA).

“It builds upon the Virginia-class program’s successful Navy and industry relationship,” he added, referring to the program as “a model of acquisition excellence.”

The two companies selected for this project are prime contractor General Dynamics Electric Boat (NYSE: GD) and chief subcontractor Huntington Ingalls Newport News (NYSE: HII).

Representatives from the two firms provided a joint statement:

“This is the largest number of boats ordered to date in a single contract block, which is great news — particularly in light of today’s challenging economic and political environments,” said Newport News Shipbuilding President Matt Mulherin.

“This award has great significance for the US Navy, our company and the entire submarine industrial base,” Jeffrey Geiger, president of Electric Boat, said in the statement. “By continuing to produce two ships per year, the Navy and industry team retains the stability required to achieve increased efficiencies, providing the fleet with the submarines it needs to sustain the nation’s undersea dominance.”

How Much Dominance is Enough?

Ten Virginia-class submarines already have been delivered and are in service, while an additional eight are under construction or on order.

The North Dakota is the most recent to be launched. A member of the previous cluster of Virginia-class subs to be ordered (Block III), it first took to the water in September of last year.

Each submarine displaces 7,800 tons submerged, with a hull length of 377 feet and diameter of 34 feet.

Official data lists these ships as “capable” of speeds greater than 25 knots with a diving depth greater than 800 feet, while carrying Mark 48 advanced capability torpedoes, Tomahawk land-attack missiles, and unmanned underwater vehicles.

Now, I can anticipate the question many of you are mulling over right now… Do we need such expensive weapons at a time when the U.S. Navy has nothing resembling a close rival?

Crazy Ivan

As of 2013, the answer to that may be a resounding yes, and here’s the reason…

The Russians — whose submarine fleet once rivaled the American Navy’s potential for projecting nuclear and conventional strike capability — are entering a bit of a revival.

Having lost most of their Cold War-era fleet to neglect, budget cuts, political turmoil, and accidents, their newly emerging submarine fleet consists of equally modern and expensive machines.

Namely, the Graney-class attack submarine (Russian codename: Yasen).

The first of this class, the Severodvinsk, had its keel laid down initially in 1993.

This was poor timing just after the collapse of the Soviet Empire, and the project was on hold for years… something that, while costly and inefficient, allowed for a far more modern final product when the submarine was finally launched in 2014.

Comparing the stats on these two vehicles, even a casual observer will quickly see why the U.S. Navy has been eager to bolster its own Silent Service.

The Severodvinsk displaces nearly twice as much as its Virginia-class competitors — and yet it boasts a far smaller crew (135 for the American sub versus just 90 for the Russian).

This means two things: The Severodvinsk employs a high level of automation, and it can store far more supplies and weapons — allowing for longer patrols and more firepower when the time comes to use it.

According to officially published data, the Severodvinsk can also dive far deeper — more than twice as deep, in fact, as it’s rated to almost 2,000 feet.

Its speed as listed as 35 knots submerged — putting it close to or even with the American sub.

Its weapons capability, however, is what’s really worrisome to American analysts.

The Severodvinsk is armed with the standard arsenal of guided torpedoes, as well as conventional and nuclear-tipped cruise missiles capable of ranges beyond 3,000 miles; anti-ship missiles and mines; and Russia’s state-of-the-art Shkval, a guided supercavitation torpedo (more of an underwater missile, really) that has been tested at speeds exceeding 200 knots, or about four times the speed of its Western rivals.

So despite the somewhat dated hull, its technical capabilities are as 21st century as they get.

All this makes the Severodvinsk not only the most heavily armed attack submarine ever but also, at $2.2 billion, the most expensive one to boot.

Of course, much of this cost is associated with the duration of the build, but the technical capabilities of the new boat are undeniable.

And so is the American response.

Numerical Superiority. Better Integration. Less Noise.

While the Russians are currently building two more Graney-class boats and have seven additional units on order, the Americans already have 10 Virginia-class subs in the water and on active duty patrolling the seas.

And while the American subs might not be able to lay waste to city-sized targets from 3,000 miles away, they have one advantage that all but neuters the overwhelming Russian brute force: They’re quieter.

In a combat medium where silence is what keeps you alive, the Russian sub is just a tad louder than the latest Virginia-class boats.

According to Western analysts, the Graney-class subs will produce about the same level of noise as the first generation Virginia-class attack subs.

This is good, but it might not be good enough.

Coupled with the vast numerical advantage, not to mention the fact that the Virginia-class subs usually operate alongside American carrier groups, and the problem posed by the Severodvinsk isn’t so much game changing as it is an anomaly.

The Russian Navy certainly does not have the capacity to pose a serious strategic threat to the U.S.

It cannot win a war against the unmatched might of our carrier groups working as single units.

It can, however, cause a great deal of damage given the opportunity… One nuclear-tipped cruise missile fired from under water could vaporize an entire carrier battle group in the blink of an eye — which is exactly the sort of mission the Graney-class attack submarines were designed for.

And the fact that such a surprise probably couldn’t be executed more than once (if that) isn’t a comfort to the Pentagon.

America’s only way to ensure Russian capabilities remain limited to propaganda and intimidation is to maintain overwhelming superiority.

It’s a defense doctrine that goes back to the days of JFK and continues to drive the defense industry forward.

Of the two shipbuilders charged with the task of doubling our Virginia-class submarine inventory, the smaller of the two, Huntington Ingalls (NYSE: HII), is the choice for a long-term investment.

Not only is it smaller ($4.8 billion versus $41.5 billion), but it’s also more focused on shipbuilding.

Moreover, the Virginia-class sub project isn’t the only one on its current roster.

Less than two weeks ago, the Virginia-based shipbuilder started fabrication for the future Aegis-guided missile destroyer, the Paul Ignatius.

With this new contract laying out orders through 2018, Huntington Ingalls looks like a standout within the historically trendy American defense sector.

To your wealth,

Brian Hicks

Brian is a founding member and President of Angel Publishing and investment director for the income and dividend newsletter The Wealth Advisory. He writes about general investment strategies for Tech Investing Daily, Wealth Daily and Energy & Capital. Known as the “original bull on America,” Brian is also the author of the 2008 book, Profit from the Peak: The End of Oil and the Greatest Investment Event of the Century. In addition to writing about the economy, investments and politics, Brian is also a frequent guest on CNBC, Bloomberg, Fox and countless radio shows. For more on Brian, take a look at his editor’s page.