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General Dynamics Gets Army Contract

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A business unit of General Dynamics Corporation (GD - Free Report) , General Dynamics Land Systems, has been awarded an eight-year, $395 million contract by the U.S. Army TACOM Contracting Command for research, development and testing in preparation for the Abrams main battle tank Engineering Change Proposal 1, or ECP1, production. The contract has an initial value of $80 million over 12 months. There is no tank production work associated with the award.

The Abrams ECP1 program is an engineering-development effort focused on integrating a group of system improvements into a single upgrade program for the M1A2 SEP v2 baseline tank. The objective of this research-and-development effort is to prepare the Abrams tank to accept additional Army-directed requirements in the future without impacting current vehicle performance. The Army plans to begin low rate initial production of tanks with ECP1 upgrades in 2017.

Work on the contract will be performed in Sterling Heights, Michigan, and the contract will be completed by 2020. The Abrams main battle tank is planned to be an active component of the Army's fleet through 2050.

M1A2 SEP V2 is the most advanced digital tank with improved color displays, day and night thermal sights, commander remote operated weapon station (“CROWS II”), auxiliary power, a Thermal Management System (“TMS”) and a tank-infantry phone. It features a digitally connected tank with electronic high-technology and powerful computers and an open architecture that deliberately accepts future technologies without the need for significant re-design. The SEP version is an added benefit to the Abrams. It makes Abrams the most endurable tank in the world suitable to fight for decades to come.

The company has been involved in this kind of renovation work since February 2008. At the beginning of 2012, the company received a $60 million contract under which it was supposed to continue upgrading M1A1 tanks to the M1A2 V2 configuration. Later, in April, it was awarded another $31 million contract from the U.S. Army TACOM Lifecycle Management Command to upgrade 24 M1A1 Abrams main battle tanks and 22 M1A2 System Enhance Package (“SEP”) Version One (V1) tanks into the M1A2 SEP V2 configuration.

Going forward, key growth drivers for the company include the improving business jet market, its stable business of U.S. military vehicles, 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 cuts is looming. Also, we are concerned about the risks related to the execution of key projects.

The company presently retains a short-term Zacks #4 Rank (Sell). We have a long-term Neutral recommendation on the stock.

General Dynamics is expected to release its third quarter 2012 results on October 24, 2012. The Zacks Consensus Estimates for the third quarter and full year 2012 are $1.77 and $7.10, respectively.

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. The company operates through four segments: Information Systems & Technology, Combat Systems, Marine Systems, and Aerospace.

The company mainly competes with Northrop Grumman Corporation (NOC - Free Report) and Huntington Ingalls Industries Inc. (HII).

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