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Electric Boat, a wholly owned subsidiary of General Dynamics Corporation (GD - Analyst Report), procured three contracts worth $4.6 billion from the U.S Navy for designing and development of the next-generation strategic deterrent submarine. The contracts also included the task of construction and purchasing of materials for Virginia-class attack submarines.

Per the first contract worth $1.85 billion with a span period of five years, the company will perform research and development work for the next-generation strategic deterrent submarine under the Ohio Replacement Program. The construction for this new class of ballistic-missile submarine is expected to begin in 2021. Simultaneously, the company will continue to develop Common Missile Compartment for Ohio Replacement submarines and the UK Successor-class ballistic-missile submarine. Common Missile Compartment is jointly owned by the U.S. Navy and Royal Navy.

The company also received a contract to build two Virginia-class submarines, South Dakota (SSN-790) and Delaware (SSN-791). These two ships are the 17th and 18th ships of the class. The contract worth $2.5 billion will be performed jointly by Electric Boat and its team mate Newport News Shipbuilding, a division of Huntington Ingalls Industries, Inc. (HII).

Per the third contract worth $308 million, the company will purchase long lead-time materials for SSN-792, SSN-793 and SSN-794. Till date, these Virginia-class submarines have not been named.

Electric Boat has specialty in performing tasks for Virginia-class submarines. Of late in November 2012, Electric Boat had also received a contract modification to provide research and development and lead-yard services for Virginia-class nuclear-powered attack submarines.

The company believes that these contracts will bring in stability to the submarine industrial base, thereby helping it to accomplish greater cost reduction through improved efficiencies. Moreover, these contracts also demonstrate the Navy’s confidence in the ability of General Dynamics.

General Dynamics is well equipped to build nuclear-powered submarines in the U.S. Also, some acquisitions make the company more capable to perform its tasks well. In December 2012, General Dynamics had acquired Applied Physical Sciences Corporation that became a part of General Dynamics Electric Boat. This acquisition will allow the company to provide more competent submarines that will help in maintaining global undersea dominance.

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. General Dynamics’ revenue exposure is spread over a broad portfolio of products that allows to keep the overall growth momentum steady.

However, we remain concerned due to the future defense budgets that are vulnerable to cutbacks. Moreover, U.S. economic fundamentals are being kept on a leash as the Euro-crisis continues to hamper the financial markets.  The company presently retains a short-term Zacks #3 Rank (Hold) that corresponds with our long-term Neutral recommendation on the stock.

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