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General Dynamics Wins $347M Deal for Virginia-Class Submarines

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General Dynamics Corp.’s (GD - Free Report) business unit, Electric Boat, recently secured a modification contract in relation to the Virginia-class submarine program. Per the terms of the deal, the shipbuilder will offer fiscal 2019 lead yard support, development studies and design efforts for the Virginia-class submarines. 

Details of the Deal 

Valued at $346.5 million, the contract was awarded by the Naval Sea Systems Command, Washington, D.C. Under the agreement, lead yard support will maintain, update and support the Virginia class design as well as related drawings and data for each Virginia class Submarine (including technology insertion) throughout its construction and post-shakedown availability period.

General Dynamics will also deliver all engineering and related lead yard support necessary for direct maintenance and support of Virginia-class ship specifications.  In addition, this modification will entail the company tocontinue development studies and design efforts related to components and systems for accomplishing research and development tasks as well as prototypes and engineering development models required to fully evaluate new technologies to be inserted in succeeding Virginia class submarines.

The entire task is expected to be completed by September 2019, majority of which will be executed in Groton, CT.

A Brief Note on the Virginia-Class Submarine Program

The Virginia-class submarine program is a class of nuclear-powered fast-attack submarines (SSNs) serving the U.S. Navy. Designed for the full range of global mission requirements like intelligence, surveillance and reconnaissance operations as well as mine warfare, these stealthy boats excel in littoral and open-ocean environments. The Virginia-Class submarines are being jointly constructed by General Dynamics and Huntington Ingalls Industries Inc. (HII - Free Report) .

As of December 2017, Electric Boat has delivered 15 Virginia-class submarines in partnership with Huntington Ingalls. The remaining 13 submarines under the contract are scheduled for delivery through 2023.

What’s Favoring General Dynamics?

Being 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. Moreover, the United States is strategically strengthening its naval power by upgrading missile submarines as widespread geo-political tensions loom large. This, in turn, provided a significant boost to the defense contractors like General Dynamics.

Coming to the Virginia Class submarine program, it is imperative to mention that cost and time to deliver follow-on ships has been reduced consistently and significantly from 84 months to 66 months since the delivery of the lead Virginia-class submarine. Also, the mission capability and quality of the ships at delivery have improved over time. This must have made this submarine program all the more a feasible choice for the U.S. Navy as is evident from the latest contract.

Currently, General Dynamics is developing the Virginia Payload Module (“VPM”) for the fifth block of Virginia-class submarines, expected to start construction in 2019. This block of submarines will provide a considerable upgrade to its size and performance. Additionally, it is likely to significantly boost General Dynamics’ Marine System segment, which builds nuclear-powered submarines. In the third quarter of 2018, this segment generated 3.7% revenue growth.

Furthermore, toward the end of June this year, the U.S. Senate approved the fiscal 2019 defense budget that provisions for major war fighting investments worth $18.4 billion for shipbuilding. The budget included an investment plan of $7.4 billion for two Virginia-class submarines. We may expect General Dynamics to be a significant beneficiary of the aforementioned budget, which in turn, is likely to boost its profit margin moving ahead.

Price Movement

In a year’s time, General Dynamics’ stock has lost 16.1% compared with the industry’s 1.4% decline. The underperformance may have been caused by the intense competition the company faces in the industry.

 

Zacks Rank & Key Picks

General Dynamics currently carries a Zacks Rank #3 (Hold). A few better-ranked companies in the same sector are Aerojet Rocketdyne Holdings and Raytheon Company . While Aerojet Rocketdyne sports a Zacks Rank #1 (Strong Buy), Raytheon carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Aerojet Rocketdyne delivered average positive earnings surprise of 19.27% in the last four quarters. The Zacks Consensus Estimate for 2018 earnings has moved north 43.3% to $1.82 over the past 90 days.

Raytheon delivered average positive earnings surprise of 6.71% in the trailing four quarters. The Zacks Consensus Estimate for 2018 earnings has moved up 1.7% to 10 cents over the past 90 days.

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