GD Gets Submarine Service Contract

General Dynamics Corporation’s (GD - Analyst Report) wholly owned subsidiary Electric Boat has received a contract modification worth $88.8 million to provide research and development and lead-yard services for Virginia-class nuclear-powered attack submarines of the U.S Navy. If all the options are exercised and funded, then the contract will have a potential value of $881 million through 2014.

Per the contract, General Dynamics will perform research and development work to assess the best new technology to be introduced in newly built Virginia-class ships. Further, it will carry out development studies and other work related to Virginia-class submarine design improvements.

Recently, in October, the company had received a contract modification worth $100.04 million with respect to the current contract under which it will develop, maintain and update design drawings and data, including technology insertions, for each Virginia-class submarine throughout its construction and post-shakedown availability periods. In May 2012, it had received a $6.8 million U.S. Navy contract modification to design and procure a common controller for various shipboard functions on Virginia-class submarines. Originally, the company had received the contract worth $171.8 million in July 2010 to provide lead-yard services for Virginia-class nuclear-powered attack submarines.

Due to its proven technical capabilities, maintenance and modernization, and its ability of concept formulation and design through construction, Electric Boat has been receiving a number of contracts for Virginia-class submarines.

General Dynamics is likely to continue to deliver solid growth driven by revenue and margin expansion and cash flow generation. Looking forward, key drivers include a reviving business jet market business and a stable business for Stryker combat vehicles and Abrams tanks. Moreover, huge number of contracts would boost the company’s revenue.

However, we are concerned due to the U.S. defense budget, where the threat of budget cuts is looming. Also, we have turned slightly cautious about the company’s risks related to the execution of key projects.

Like its peers, Lockheed Martin Corporation (LMT - Analyst Report) and Northrop Grumman Corporation (NOC - Analyst Report), the company presently retains a short-term Zacks #3 Rank (Hold) that corresponds with our long-term Neutral recommendation on the stock.

Based in Falls Church, Virginia, General Dynamics Corporation engages in mission-critical information systems and technologies; land and expeditionary combat vehicles, armaments and munitions; shipbuilding and marine systems; and business aviation.