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BAE Systems (BAESY) to Manufacture Submarines for Australia

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BAE Systems Inc. (BAESY - Free Report) recently announced that it has been selected by Australia’s government to build nuclear-powered submarines as part of a joint military program.

The deal, with ASC Pty Ltd as a partner, forms part of the AUKUS trilateral security pact between the U.K., Australia and the United States. Per the AUKUS agreement, Australia and the U.K. will operate a common submarine, with technology incorporated from all three nations, based on the U.K.’s next-generation design, which BAE Systems is leading.

What Favors BAE Systems?

To strengthen their defense capabilities, nations are rapidly increasing defense spending of late. In this context, investments in sea warfare capabilities involving submarines for both defense and offensive proposes have significantly gained traction. This should benefit BAE Systems, which builds the Astute Class and Dreadnought Class submarines.

Since the AUKUS announcement in March 2023, BAE Systems has increased its U.K. submarine workforce to 13,500 with an aim to grow to around 17,000 to support the SSN-AUKUS submarine program. Notably, the SSN-AUKUS will be the largest and most powerful attack submarine for the Royal Navy.

In October 2023, the U.K. Ministry of Defence awarded BAESY with 3.95 billion pounds for development work related to SSN-AUKUS through 2028. Built to replace the current Astute Class, the first U.K. submarine under the SSN-AUKUS program will be delivered in the late 2030s, and the first Australian submarine will follow in the early 2040s.

Such developments should substantially benefit BAESY and boost order flows for its manufactured submarines, like the latest one. Such contract wins should bolster its revenue generation prospects in the Maritime segment, which comprised 22% of its total revenues in 2023.

Growth Prospects

Efficient submarines equipped with nuclear weapons add to a nation’s military capabilities and deter any potential nuclear attack in sea warfare missions. The advancement in submarine technology and its difficult-to-detect feature further contribute to its diverse advantages, thereby bolstering submarine demand worldwide.

Per a report by the Research and Markets firm, the global submarine market is expected to witness a compound annual growth rate of 4.3% during 2024-2028. This indicates ample growth opportunities for BAE Systems as it enjoys a lucrative position in the submarine space.

Some other defense players that can gain from the expanding submarine market are General Dynamics (GD - Free Report) , Northrop Grumman (NOC - Free Report) and Huntington Ingalls Industries (HII - Free Report) .

General Dynamics’ Electric Boat business unit is the prime contractor and leading shipyard on all Navy nuclear-powered submarine programs in the United States. The company ended 2023 with a backlog worth $18 billion for Virginia-class submarines and $13.3 billion for Columbia-class.

GD boasts a long-term (three-to five-years) growth rate of 10.8%. The Zacks Consensus Estimate for 2024 sales indicates growth of 10.1% from 2023.

Northrop has systems and sensors fielded on Virginia-class submarines. NOC also builds the launcher subsystem for a common missile compartment for the U.S. Navy’s Columbia and the Royal Navy’s Dreadnought submarines.

NOC boasts a long-term growth rate of 10.1%. The Zacks Consensus Estimate for 2024 sales indicates growth of 4.6% from 2023.

Huntington Ingalls is a co-developer of the Virginia-class fast-attack nuclear submarines, along with GD’s Electric Boat. Its Newport News division participates in the design and construction of the Columbia-class (SSBN 826) submarine as a replacement for the current aging Ohio-class nuclear ballistic missile submarines.

HII boasts a long-term growth rate of 6.5%. The Zacks Consensus Estimate of HII’s 2024 sales indicates growth of 2% from 2023.

Price Performance

In the past six months, shares of BAE Systems have gained 38.9% compared with the industry’s 25.4% rise.

Zacks Investment Research
Image Source: Zacks Investment Research

Zacks Rank

BAE Systems currently has a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank stocks here.

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