General Dynamics Wins $696M Deal For Nuclear Submarines

General Dynamics Corp.’s (NYSE:GD) subsidiary, Electric Boat, recently clinched a modification contract worth $696.2 million for supplying long lead time materials for the construction of fiscal 2019 and fiscal 2020 Virginia-class submarines.

Details of the Deal

Majority of the work related to the deal will be carried out in Sunnyvale, CA; while the rest will be executed in different parts across the United States as well as Loanhead, United Kingdom. The contract was awarded by the Naval Sea Systems Command, Washington, DC.

Per the terms, the deal will offer long lead time material for steam and electric plant components; the main propulsion unit efforts and ship service turbine generator efforts; and miscellaneous hull, mechanical and electrical system components. Fiscal 2018 shipbuilding and conversion (Navy) funds will be utilized to complete the task by January 2019.

A Brief Note on Virginia-Class Submarine

The Virginia-class submarine program is a class of nuclear-powered fast-attack submarines serving the U.S. Navy. These submarines are designed for a broad spectrum of open-ocean and littoral missions, jointly constructed by General Dynamics and Huntington Ingalls Industries (NYSE:HII) .

The submarines are also designed for intelligence, surveillance and reconnaissance operations as well as mine warfare. These vessels are one of the three classes of attack submarines used by the U.S. Navy. The other two are the Los Angeles class and the Seawolf class. Valued around $2.7 billion each, these submarines will be operational until 2070.

Our View

General Dynamics, being one of the only two contractors in the world equipped to build nuclear-powered submarines, enjoys a dominant position as a Navy contractor. Nations are strategically strengthening their arsenal and naval power by upgrading submarines as widespread geo-political tensions loom large.

Notably, Electric Boat is the prime contractor for the Navy’s Virginia-class submarine program. It continues to operate at a two submarines-per-year construction rate and has delivered 15 Virginia-class submarines as of 2017-end, in conjunction with Huntington Ingalls. Impressively, since the delivery of the lead Virginia-class submarine, the cost and time to deliver follow-on ships has been reduced consistently and significantly, from 84 months to 66 months, while improving the mission capability and quality of the ships at the time of delivery.

The remaining 13 submarines under contract are scheduled for despatchthrough 2023. This reflects that the company has opportunities to win more such contracts like the latest one, in relation to supporting the construction of these 13 submarines, which in turn will provide impetus to its growth story.

The recently announced budget proposal made by Trump provisions a spending of $18.3 billion on Shipbuilding. The latest budget includes $7.4 billion for buying 2 Virginia-Class Submarines, for which General Dynamics is the prime contractor. This in turn is expected to further strengthen the company’s position in the nuclear-powered submarine industry.

Price Performance

In a year’s time, General Dynamics’ shares have rallied 17.2% compared with the broader industry’s gain of 46.6%. The underperformance may have been led by the intense competition that the company faces in the aerospace-defense space.

Zacks Rank & Key Picks

General Dynamics has a Zacks Rank #3 (Hold).

Some better-ranked stocks in the same industry are Boeing (NYSE:BA) ) and Wesco Aircraft Holdings (NYSE:WAIR) . While Boeing sports a Zacks Rank #1 (Strong Buy), Wesco Aircraft carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Boeing delivered an average positive earnings surprise of 20.69% in the last four quarters. The Zacks Consensus Estimate for 2018 earnings moved up $2.99 over the past 90 days.

Wesco Aircraft posted positive earnings surprise of 25% in the last quarter. The Zacks Consensus Estimate for 2018 earnings moved north by 4 cents over the past 90 days.

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