Austal Management, page-12

I'm new to investing, but betting money on a low likelihood conflict with dubious implications for this company seems like an unsound application of conditional probability. As in, let's generously assume that there's a 25% chance that military conflict between China and the US occurs, you would still have to have a less than 25% chance that the naval component is even a key factor. You may very well be buying into a steel company doomed to be overrun by the Germans in the first week of the war (said another way, China's cyber capability may halt production, or the war, before you return any profit. This could also be a long range ballistic missile, nuclear weapon or any other force projection available to them). Another issue with your probability calculation here is that, again, the length of the war is all but certain- the time it takes to produce a ship spans years. The US has planned its Naval production into the 2030s and beyond.

Which "strategists" are predicting the outcome you're describing? And you understand that they're playing the game of probability too, right? When they say there's a chance of an extended war, they might just mean that it's very unclear and the chances of war are low, but a long, slow burn conflict is just the most likely outcome conditional upon a war occurring.

I think you're way too confident that a war will be of benefit to this company overall. It might, but the probability of A can't ever be less than the probability of A + B, right? So you would need to rate the probability of war very high, rate the probability of naval production being an important component of the war to be lower, the probability of this particular company to be benefited to be lower still, and the chance of the war continuing long enough for this company to see a profit to be even lower again. And there's even fringe risk of China simply deleting your bank account, decreasing the EV calculation even more. Not to mention the fact that the entire stock market will almost certainly dive the second war is declared. Have you factored that in too? So the stock price will have to recover fully and then increase dramatically to make your investment worth the risk.

But I think you're undervaluing the profitability of much more tangible and realistic potential contracts. The LAW program has a potential total revenue of $3b USD. Austal is one of 5 companies competing for the contract, giving our EV calculation a $600m USD value to be committed by next September. The company seems to be undervalued by around a third, with some fringe case (under 5%, increasing by 1% or so every year or so) chances of quickly scaling up if autonomous ships become popular and cheap.