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General Dynamics Wins $29M Contract for Nuclear Submarines

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General Dynamics Corp.’s (GD - Free Report) subsidiary, Electric Boat, has clinched a $28.6 million modification contract to exercise options for reactor plant planning yard services for nuclear-powered submarines.

The company will also support yard services for the Navy’s moored training ships. Markedly, the deal has been awarded by the Naval Sea Systems Command, Washington, D.C.

About the Contract

Per the modification contract, Electric Boat will offer furnishing, fabricating, or purchasing materials, supplies and services that will likely be required to perform the functions of the planning yard for reactor plants and related portions of the propulsion plants for nuclear powered submarines. The unit will also support yard services for moored training ships.

While majority of the work will be performed at Groton, CT, the rest will be performed at Charleston, SC. It will be completed, using fiscal 2018 operations and maintenance (Navy) as well as fiscal 2017 other procurement (Navy) funds, by September 2018.

Nuclear Submarines and the United States

To counter the rising geopolitical tensions across the world, the U.S. government has been designing submarines for decades. In 1954, the U.S. Navy was the first to launch a nuclear-powered submarine. These submarines were markedly better than the diesel-engine ones that had to make multiple stops for refueling.

Currently, the U.S. Navy has three classes of nuclear-powered attack submarines — Virginia-class, Ohio-class and Los Angeles-class.

In fact, the market for nuclear submarine is a consolidated one in the United States, operated by two prime players like General Dynamics and Huntington Ingalls Industries, Inc. (HII - Free Report) . As a result, both the companies enjoy a large share of the market and high profit margins.

In this context, it is imperative to mention that recently the U.S. administration has been allotting significant provision for nuclear submarines in the nation’s defense budget, thereby encouraging submarine-manufacturers in boosting their production. Evidently, in the fiscal 2017 budget proposal $8.1 billion fund was allocated for submarines.

Our View

General Dynamics enjoys a dominant position as a Navy contractor. This is because it is one of the only two contractors in the world equipped to build nuclear-powered submarines. In addition, the company is a prime contractor for the development of Columbia-class submarines and Virginia-class submarines.

Given the Navy’s recent acknowledgement of the nuclear submarines as its top priority and the huge budget allotted to the same, we believe the modification contract will undoubtedly render the company a leading position in the nuclear-powered submarine industry.

Furthermore, the U.S. Senate Armed Services Committee recently approved fiscal 2018 defense policy bill. The National Defense Authorization Act for fiscal 2018, worth $700 billion, includes $25 billion to boost Navy shipbuilding. Going forward, the bill is anticipated to boost revenue growth for General Dynamics, which is one of the prime shipbuilders in the United States.

Price Movement

Shares of General Dynamics have surged 41.8% in a year, underperforming the industry’s gain of 43.7%. This might have been caused by the company’s declining backlogs in recent times. Additionally, the stock faces stiff competition from its industry peers like Boeing Company (BA - Free Report) and Northrop Grumman Corporation (NOC - Free Report) .

Zacks Rank

General Dynamics carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

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