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General Dynamics NASSCO, a wholly owned subsidiary of General Dynamics Corporation (GD - Analyst Report), announced that it has finalized a contract with TOTE Inc., for the design and construction of two 3,100 TEU LNG-powered containerships. When completed the 764-foot-long containerships are expected to be the largest ships of any type in the world primarily powered by liquefied natural gas.

Construction is scheduled to begin in the first quarter of 2014, with first delivery to occur by the fourth quarter of 2015. The second ship will be delivered in the first quarter of 2016. The contract between NASSCO and TOTE Shipholdings Inc., a subsidiary of TOTE Inc., includes options for three additional ships.

The ships will be designed by DSEC, a subsidiary of Daewoo Shipbuilding & Marine Engineering, located in Busan, South Korea.

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.

Looking forward, key growth drivers for General Dynamics include the improving business jet market, its stable business of U.S. military vehicles, a backlog (though declining) of $51.5 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 high. Also, we have turned slightly cautious about the company’s steadily dropping order backlog, and risks related to the execution of key projects.

General Dynamics’ total order backlog decreased to $51.5 billion at the end of the first nine months 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 7.9% 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.

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