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General Dynamics Wins $85M Deal to Aid Nuclear Submarines

Defense behemoth General Dynamics Corp.'s GD business division, Electric Boat, recently secured a modification contract to offer additional long-lead material in support of the fiscal 2019 Virginia-class submarines. Work related to this deal is scheduled to be over by Jan 2018.

Details of the Deal

Valued at $85 million, this contract was awarded by the Naval Sea Systems Command, Washington, D.C. The majority of the work will be carried out in Spring Grove, IL; Coatesville, PA; Bethlehem, PA; Arvada, CO; Irvine, CA and Cleveland, OH. The remaining portion will be performed at various places across the U.S.

Per the modification, Electric Boat will supply long-lead time material for steam and electric plant components, the main propulsion unit efforts and ship service turbine generator efforts, and miscellaneous hull, mechanical and electrical system components to support the construction of the submarine models ­– SSN 802 and 803. The contract will utilize fiscal 2017 shipbuilding and conversion (Navy) funding to complete the work.

A Brief Note on Virginia-Class Submarine

The Virginia-class submarine program is a class of nuclear-powered fast-attack submarines (SSNs) serving the U.S. Navy. These submarines are designed for a broad spectrum of open-ocean and littoral missions. General Dynamics and Huntington Ingalls Industries Inc. HII jointly construct these submarines.

The submarines are also designed for intelligence, surveillance and reconnaissance operations as well as mine warfare. These vessels are one of the three classes of attack submarines used by the U.S. Navy. The other two are the Los Angeles class and the Seawolf class. The submarines will be operational until 2070 and costs around $2.7 billion each.

What’s Favoring General Dynamics?

As one of the only two contractors in the world equipped to build nuclear-powered submarines, General Dynamics enjoys a dominant position as a Navy contractor. In Dec 2015, the Navy updated its force-level goal from its prior target to achieve and maintain a 308-ship fleet, including 48 SSNs to 355-ship fleet, including 66 SSNs. This clearly reflects the immense priority that the U.S. Navy bestows upon this class of nuclear submarines.

Going forward, the Navy plans to build an advanced model of Virginia-class submarines in the subsequent years. This will come with an additional mid-body section, called the Virginia Payload Module (VPM). The launch tubes of VPM will have the capability to carry a total of 28 additional Tomahawk cruise missiles. The Navy’s proposed fiscal 2017 budget requests $97.9 million in research and development funding for the VPM. This indicates additional defense contracts for General Dynamics, which, in turn, is expected to boost the corporation’s growth trajectory.

The Navy has acknowledged the Virgina-class program as one of its top priority and a sumptuous budget has been allotted to the same. This bodes well for General Dynamics as it is the prime contractor. The modification contract will undoubtedly put the company in a leading position in the nuclear-powered submarine industry.

Price Movement

General Dynamics's stock rallied about 50.5% in the last one year, outperforming the Zacks categorized Aerospace/Defense industry's gain of 32.8%. This could be because the company consistently maintains a strategic alliance with the U.S. Department of Defense, which allows it to enjoy a steady flow of contracts. Moreover, the stock's performance is in line with its peers like Boeing Company BA and Engility Holdings, Inc. EGL, which also outperformed the Aerospace/Defense industry.

Zacks Rank

General Dynamics currently sports a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here

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