General Dynamics Gets Sub-Contract

General Dynamics Corporation ( GD - Analyst Report ) announced that its wholly owned subsidiary General Dynamics Electric Boat has been awarded an $11 million contract modification from the U.S. Navy. Per the contract the company would support research and development of advanced submarine technologies for current and future undersea platforms.

As per the modifications, Electric Boat will perform advanced submarine research and development studies in support of a wide range of technology areas including manufacturability, maintainability, survivability, hydrodynamics, acoustics and materials. General Dynamics will conduct research and development work in additional areas including hull integrity, performance, ship control, logistics, weapons handling and safety. The program also supports near-term insertion of Virginia-class technology, identification of Ohio-class replacement technology options, future submarine concepts and core technologies. The contract, which was initially awarded in November 2010, has a potential value of $711 million over five years if all options are exercised and funded.

Looking forward, key drivers include the improving business jet market, its stable business of U.S. military vehicles, a backlog (though declining) of over $55 billion, an ongoing share repurchase program and strong cash flow generation. However, the company is largely tied to the U.S. defense budget, where the threat of budget cut is looming. Also, we have turned slightly cautious about the company’s steadily dropping order backlog, and risks related to the execution of key projects.

Headquartered in Falls Church, Virginia, General Dynamics engages in mission-critical information systems and technologies; land and expeditionary combat vehicles, armaments and munitions; shipbuilding and marine systems; and business aviation. The company operates through four segments: Information Systems & Technology (IS&T), Combat Systems, Marine Systems, and Aerospace.

General Dynamics was the third largest U.S. defense contractor in terms of revenue in fiscal 2011, after The Boeing Company ( BA - Analyst Report ) and Lockheed Martin Corporation ( LMT - Analyst Report ) . The company is one of two contractors equipped to build nuclear-powered submarines in the U.S.

General Dynamics continues to benefit from strong congressional support for its programs in the 2012 defense budget. The U.S. defense budget for 2012 was $645.7 billion, with the base budget at $530.6 billion and $115.1 billion approved for Overseas Contingency Operations (“OCO”) as supplementary defense spending, mainly to fund ongoing wars. Going forward, OCO funding is expected to continue to decline as troops redeploy out of Afghanistan.

For the future, the company’s focus will be on the revival of the business jet market (Gulfstream) along with programs such as the Warfighter Information Network Tactical (WIN-T) program and Joint Tactical Radio System (JTRS) in the IS&T division.

Similarly, the Combat Systems and Marine Systems segments will receive a boost from higher volumes in the U.S. military vehicle business (Stryker combat vehicles and Abrams tanks) and ship programs DDG-51, Virginia class submarines and the Mobile Landing Platform program.

General Dynamics’ total order backlog steadily decreased to $55.2 billion at the end of the first quarter of 2012 from $59.6 billion at fiscal-end 2010. Going forward, the U.S. economic fundamentals are basically being kept on a leash as the Euro-crisis continues to cast its spell over the financial markets, keeping risks of further cutbacks in future defense budgets at a high level. Our apprehension is fueled by $15 trillion of national debt and an unemployment rate hovering around 8.1% which would lead to the Budget Control Act’s dictum of automatic cutbacks across the board going forward.

Going by the pulse of the economy and the pros and cons, we prefer to maintain our long-term Neutral recommendation on the stock. Moreover, General Dynamics holds a Zacks #3 Rank that translates into a short-term Hold rating.