Since the end of World War II, the United States has been unmatched in its role as a global superpower. No one can dispute the country’s influence shaping the world economically, politically and culturally.  

However, in the last several decades, new powers have begun to emerge. 

This inherent tension presents a wealth of opportunity for the companies that design and manufacture products for the cash-rich defense industry.

Take, for example, the Asia-Pacific region. India, Singapore, South Korea, Vietnam, Mongolia, Laos and the Philippines are all on the rise.

As nations grow, they aim for greater power and influence over their neighbors. And while many of these nations are trade partners and allies with the U.S., all of these countries share a common concern: China.

China — whose GDP has grown 90-fold since 1978 — overtook Japan as the world’s second largest economy in 2010. Despite slowing down in 2014, its economy is expected to grow by 7.4% in 2015, nearly tripling the expected growth of the United States.

In 2013, U.S. military spending fell 7.8%, while China’s rose 7.4%. Between 2004 and 2013, China’s military spending grew 170% to $188.5 billion.

Wary of China’s growing reach, the United States has been repositioning itself over the last 20 years, away from the oil-rich Middle East toward the fast-growing Asia-Pacific. President Barack Obama calls this the “Asian Pivot.”

While most attention for U.S. foreign and military policy has been focused on the Middle East in recent years, China has been quietly flexing its influence in its own backyard. The South China Sea, for example, has seen a growing number of territorial disputes between China and its neighbors (Japan, South Korea, to name a few). The source of the tension: claims to control of strategic waters and islands in the area, which is home to some of the most important trade routes in the world. 

For the United States and its allies, a more daring, powerful China threatens stability and could harm crucial trading activity in the region — or worse, lead to armed conflict.

Consider this… It has been widely reported that China has at least one aircraft carrier in its navy (currently used for training purposes), but has plans for several more in the coming years. 

And even though 60% of the U.S. Navy is currently deployed in the region, Chinese submarines outnumber American by nearly two-to-one.

Right now, none of this should be cause for extreme concern (at least in the short-term.) But even in an environment of tight budgets in the U.S., it’s clear that the Pentagon must deploy additional resources to the region if the “pivot” is going to work.

That’s why, as the United States seeks to grow its military — and particularly naval — presence in the region, President Obama proposed a new budget plan last month that would allocate $561 billion for new defense spending for fiscal 2016. That’s a 4% increase over the previous year, and $38 billion above the caps set by Congress in 2011 during the “sequester.” 

One of the prime beneficiaries of this new spending will be Huntington Ingalls Industries, Inc. (NYSE: HII).

For more than 100 years, Huntington Ingalls has been building ships, aircraft carriers and submarines for the U.S. Navy at their shipyards in Virginia and Mississippi. 

There are only two companies that own the shipyards and have the resources necessary to meet this growing need for naval assets: Huntington Ingalls and General Dynamics (NYSE: GD).

While Huntington is dwarfed by General Dynamics in size (GD’s market cap is roughly six times Huntington’s), I like Huntington as more of a pure-play on this theme. That’s because it’s the largest military contractor of its kind, specializing only on naval military needs. 

That’s led to an enormous $21.4 billion backlog of contracts for new aircraft carriers, submarines and amphibious ships in recent years.

If any company can stake claim to a truly “wide moat” — assets or a business model that’s irreplaceable by competition — then Huntington Ingalls is certainly one. Not only is its business critical to the U.S. Navy’s survival, but because defense spending is government-controlled, competition is regulated and contracts are virtually guaranteed.

Revenue from Huntington Ingalls’ Virginia shipyard (where it works on new aircraft carriers and submarines) has grown to $4.5 billion in fiscal 2014 from $3.4 billion in 2008. In 2014, this single shipyard accounted for 65% of the company’s total revenue for the year. Bloomberg analysts estimate revenues at the Virginia facility  could grow to $7.1 billion in 2016.

The company recently announced total year earnings of $8.10 per share in 2014, nearly double its $4.57 earnings per share in fiscal 2013. 

This month, Huntington Ingalls received a $23 million down-payment to begin work on the nuclear-powered aircraft carrier John F. Kennedy. In total, the U.S. Navy is projected to hand over $11.5 billion for the finished product over the next five to seven years, according to Virginia-based newspaper Daily Press. That’s in addition to its existing contracts for two Virginia-class nuclear submarines, overhaul of existing aircraft carriers, amphibious assault vehicles, among others.

Risks To Consider: The direction of government spending under the Republican-controlled Congress is uncertain at this point. Even if Obama’s recent proposal is passed, budget caps could return and once again limit resources in the Pacific.

Action To Take –> Despite solid share price performance (up 25% year-to-date), Huntington Ingalls looks undervalued. Shares trade at a very reasonable 15 times expected earnings for 2016. But what really stands out is the stock’s PEG ratio. PEG measures a company’s price-to-earnings to its earnings-per-share growth. A PEG less than one usually indicates good value; HII’s is just 0.8.

My colleagues Brad Briggs and Jimmy Butts identified HII as an undervalued stock with serious momentum behind it back in November. So far, it’s delivered a gain of about 30% for readers of their premium newsletter, Maximum Profit. They continue to hold it in one of their portfolios today, and by using their rigorously tested computer system, they should be able to lock in nice gains whenever it’s time to sell. 

P.S. Brad and Jimmy’s Maximum Profit system has led to 42%… 57%… and even 90% gains for readers in recent months. If you’d like to profit from their picks, too, click here to read about their system.