General Dynamics Unit Wins $25M Nuclear Submarine Deal

Zacks Equity Research, Nasdaq.com
14 June 2017

Defense behemoth General Dynamics Corp. 's GD business division, Electric Boat Corp., secured a modification contract worth $25.1 million from the U.S. Navy to provide additional Long Lead Time Material (LLTM) related to fiscal 2019 Virginia Class Submarine (SSNs 802 and 803).

Details of the Deal

Per the agreement, Electric Boat will provide LLTM for steam and electric plant components, and miscellaneous hull, mechanical and electrical system components. The contractor will also offer efforts in connection with the main propulsion unit and ship service turbine generator.
Work related to this deal is scheduled to be completed by Jan 2018. Majority of the work will be executed in Coatesville, PN, while the rest in various locations across the U.S. The company will utilize fiscal 2017 shipbuilding and conversion (Navy) funds.
A Brief Note on Virginia-Class Submarines
The Virginia-class program comprises nuclear-powered fast-attack submarines serving the Navy. These submarines are designed for a broad spectrum of open-ocean and littoral missions. Notably, Virginia-class submarines are designed for intelligence, surveillance and reconnaissance (ISR) operations as well as mine warfare.

Current Scenario

Attack submarines are designed to seek and destroy enemy submarines as well as surface ships. Currently, the Navy has three classes of nuclear-powered attack submarines - Virginia-class, Ohio-class and Los Angeles-class. These submarines will be operational through 2070.

Our Take

As one of the only two contractors in the world equipped to build nuclear-powered submarines, General Dynamics enjoys a dominant position as a Navy contractor. The company continues to be a prime contractor for the development of Virginia-class submarines, with Huntington Ingalls Industries Inc. HII acting as the subcontractor.
The fiscal year 2017 spending bill, approved by Obama government, includes $582.7 billion in funding for the Pentagon, which comprise $71.4 billion for R&D and $8.1 billion for submarines (with over $40 billion in the next five years). We believe this will definitely drive growth at General Dynamics' nuclear submarines division, going forward.
General Dynamics' revenue exposure is spread over a broad portfolio of products and services that will keep the overall growth momentum steady. Electric Boat is a unit of Marine Systems, which is a leading U.S. shipbuilder, designing, building and supporting a diverse portfolio of ships for the Navy and commercial customers. In partnership with the Navy, Electric Boat has been successfully pursuing its goal to reduce ship costs while focusing on improving overall efficiency.

Price Movement

Shares of General Dynamics have rallied 43.8% in the last one year, outperforming the Zacks categorized Aerospace-Defense industry's gain of 25.4%. This could be because General Dynamics consistently maintains a strategic alliance with the U.S. Department of Defense, which allows it to enjoy a steady flow of contracts. Consistent deal wins also allow its peers like Lockheed Martin Corp. LMT and Northrop Grumman Corp. NOC keep up their industry-leading performance.