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General Dynamics Corporation (GD - Analyst Report) has won a $32 million contract from Northrop Grumman Corporation (NOC - Analyst Report) for communications network technology for the NATO Alliance Ground Surveillance (“AGS”) program. Alliance Ground Surveillance is a NATO programme for acquiring an airborne ground surveillance capability.
Under the contract, General Dynamics will offer the software required to control the AGS Communications Ground Control System, or CGCS. The CGCS will manage radio and satellite communications between Global Hawk unmanned aerial vehicles and the main operating base in Sigonella, Italy.
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 essentially the company’s improving business of 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 looming large. 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 being effectively kept on a leash as the Euro-crisis continues to cast its spell over the financial markets, making them more and more prone to risks of further cutbacks in future defense budgets. Our apprehension is further 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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