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Newport News Shipbuilding (“NNS”), a division of Huntington Ingalls Industries (HII - Snapshot Report), has received a contract extension worth $407.4 million for engineering, planning, and long-lead time material procurement for the aircraft carrier John F. Kennedy (CVN 79). Per the contract, the company is authorized to provide additional efforts for engineering, planning and material procurement and additional manufacturing efforts.

Under this contract, the company will perform all the services required before the full construction contract is awarded. The full construction contract for the same is expected to be awarded later in 2013.

Originally, in Nov 2006, Northrop Grumman had received the contract for the planning and design of CVN 79. In May 2011, the US Navy renamed the carrier as John F. Kennedy (CVN 79). Construction of the carrier began in Feb 2011 and is expected to be completed in 2020.

Huntington Ingalls has been receiving contracts for the carrier one after the other. In March alone, the company received two successive contracts related to the construction of this advanced aircraft carrier. Earlier this month, the company received a contract worth $65 million to procure additional long lead material and advance construction activities. With the current contract, the amount comes to $472.4 million. Six months ago, in Sep 2012, Huntington Ingalls had received a contract modification worth $296 million for continuation of long-lead-time material procurement for CVN 79.

John F. Kennedy is the second ship in the Gerald R. Ford class, the Navy’s newest class of nuclear aircraft carriers. The Ford class incorporates improvements in capability and is designed to reduce total ownership cost over that of the Nimitz class. Cost reduction measures include maximizing work in earlier stages of construction so that the work can be done more efficiently, re-sequencing unit construction to build similar units repetitively, lowering the number of lifts required to erect the ship, and improving the processes and tools that increase productivity.

Back-to-back contracts wins would add to the top and bottom line of the company. Moreover, the company’s efforts to reduce its cost structure would help expand margins. However, we remain concerned about defense cutbacks on high-cost platform programs, over-exposure to the DoD budget and cost over-runs. The company presently retains a short-term Zacks Rank #3 (Hold).

Other stocks worth considering are The Boeing Company (BA - Analyst Report) and Lockheed Martin Corporation (LMT - Analyst Report), both with a Zacks Rank #2 (Buy).

Huntington Ingalls Industries designs, builds and maintains nuclear and non-nuclear ships for the U.S. Navy and Coast Guard and provides after-market services for military ships around the globe. Huntington Ingalls, originally a Northrop Grumman Corporation (NOC - Analyst Report) subsidiary, was spun off in Mar 2011. It operates major shipyards in Louisiana, Mississippi and Virginia.

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