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General Dynamics Gets Navy Contract

NOC BA GD

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General Dynamics Electric Boat, a subsidiary of aerospace and defense company General Dynamics Corporation (GD - Analyst Report), won a $459 million contract from the US Navy for the modification of nuclear submarines. The contract was first awarded in October 2011 and is likely to accrue a value of $1.2 billion over a period of three years.

As per the agreement, Electric Boat will provide engineering, design, logistics support and research and development facilities for the active U.S. submarines and submersibles. Besides, it will deliver information and maintenance services combined with modernization, training and cost control services.

General Dynamics is focusing on high-quality Navy projects in order to keep its growth momentum steady, especially in the face of weak U.S. defense environment. The company recently secured a $100.4 million modification contract from the US Navy to provide lead-yard services for Virginia-class nuclear-powered attack submarines.

We believe General Dynamics’ string of contract wins during the second quarter 2012 would help the company fetch stable returns. In addition, the company’s aerospace business looks encouraging and is expected to witness production ramp-up thereby contributing to near-term top-line growth.

However, stringent defense budgetary cutbacks by the government, less active repurchase programs and execution risks could pose serious challenges to General Dynamics’ growth goals. Also, a decline in the company’s Information Systems and Technology business in the second quarter 2012 and low dividend yield make us skeptical about General Dynamics’ financial performances in the following quarters.

The company trimmed its earnings guidance range for 2012 to $7.00–$7.10 per share from $7.10–$7.20 per share earlier. The Zacks Consensus Estimates for the third quarter and full year 2012 are currently pegged at $1.77 per share and $7.10 per share, respectively.

The company mainly competes with The Boeing Company (BA - Analyst Report) and Northrop Grumman Corporation (NOC - Analyst Report). General Dynamics presently has a Zacks #4 Rank (Sell rating). Over the longer run, we maintain our Neutral recommendation on the company.

Based 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, Combat Systems, Marine Systems, and Aerospace.

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