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General Dynamics Wins Modification Deal for USS Washington

Zacks

Military shipbuilder General Dynamics Corporation’s GD business division, Electric Boat, recently secured a modification contract worth $20.6 million for planning and execution of USS Washington (SSN 787) in the post-delivery work period. Work related to this deal is scheduled to be over by February 2018.

Details of the Deal

The contract was awarded by the Supervisor of Shipbuilding, Conversion and Repair, Groton, CT. Per the terms of the agreement, Electric Boat will conduct planning and execution-related tasks including long-lead-time material procurement. These tasks will aid in accomplishing the maintenance, repair, alterations, testing and other work on USS Washington during the scheduled post-delivery work period.

Majority of the work will be carried out in Newport News, VA. The company will utilize fiscal 2015, 2016, and 2017 shipbuilding and conversion funds to finish the task.


A Brief Note on USS Washington

USS Washington is a nuclear powered, fast attack submarine (SSN) designed to operate in shallow coastal regions and maintaining the capacity for open ocean submarine warfare. It is the 14th Virginia-class attack submarine.

Huntington Ingalls Industries, Inc. HII, another stalwart in military shipbuilding space, along with General Dynamics, co-manufactured USS Washington. It is believed, that upon delivery, this ship will be the most technologically advanced submarine in the U.S. Navy’s service. It will also be the least expensive submarine as its design incorporates significant innovations to reduce acquisition costs over earlier ships of the class without impacting mission capabilities. The USS Washington was commissioned on Oct 7.

Our View

Being 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.

In December 2015, the Navy updated its force-level goal from its prior target to achieve and maintain a 308-ship fleet that comprises 48 SSNs to 355-ship fleet, including 66 SSNs. This, in turn, clearly reflects the immense priority that the U.S. Navy bestows upon this class of nuclear submarines.

The Navy plans to build an advanced model of Virginia-class submarines in the subsequent years. This will come with an additional mid-body section, called the Virginia Payload Module (VPM). In fact, the Navy has already proposed fiscal 2017 budget requests worth $97.9 million in research and development funding for the VPM.

Since majority of such attack submarines are co-developed by General Dynamics and Huntington Ingalls, for the construction of VPM, Pentagon will offer lucrative additional defense contracts to both these shipbuilders, which, in turn, is expected to boost their growth trajectory.

Furthermore, the Navy has acknowledged the Virginia-class program as one of its top priority, and a sumptuous budget has been allotted to the same. This bodes well for General Dynamics with the company being identified as the prime contractor for Virginia-Class submarines, in 2016. As a result, we expect the latest modification contract has the ability to put the company in a leading position in the nuclear-powered submarine industry.

Price Movement

Shares of General Dynamics's have rallied about 40.9% over a year, underperforming the industry's gain of 55%. This may have been caused by the fact that the company is witnessing declining backlogs in recent times. Moreover, the stock also faces stiff competition from its industry peers like Boeing Company BA and Northrop Grumman Corporation NOC.

Zacks Rank

General Dynamics currently carries a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

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