General Dynamics Corporation
(
GD
) announced that its wholly owned subsidiary General Dynamics
Electric Boat has been awarded an $11 million contract modification
from the U.S. Navy. Per the contract the company would support
research and development of advanced submarine technologies for
current and future undersea platforms.
As per the modifications, Electric Boat will perform advanced
submarine research and development studies in support of a wide
range of technology areas including manufacturability,
maintainability, survivability, hydrodynamics, acoustics and
materials. General Dynamics will conduct research and development
work in additional areas including hull integrity, performance,
ship control, logistics, weapons handling and safety. The program
also supports near-term insertion of Virginia-class technology,
identification of Ohio-class replacement technology options, future
submarine concepts and core technologies. The contract, which was
initially awarded in November 2010, has a potential value of $711
million over five years if all options are exercised and funded.
Looking forward, key drivers include the improving business jet
market, its stable business of U.S. military vehicles, a backlog
(though declining) of over $55 billion, 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
cut is looming. Also, we have turned slightly cautious about the
company's steadily dropping order backlog, and risks related to the
execution of key projects.
Headquartered 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 (IS&T), Combat Systems, Marine Systems, and
Aerospace.
General Dynamics was the third largest U.S. defense contractor in
terms of revenue in fiscal 2011, after
The Boeing Company
(
BA
) and
Lockheed Martin Corporation
(
LMT
). The company is one of two contractors equipped to build
nuclear-powered submarines in the U.S.
General Dynamics continues to benefit from strong congressional
support for its programs in the 2012 defense budget. The U.S.
defense budget for 2012 was $645.7 billion, with the base budget at
$530.6 billion and $115.1 billion approved for Overseas Contingency
Operations ("OCO") as supplementary defense spending, mainly to
fund ongoing wars. Going forward, OCO funding is expected to
continue to decline as troops redeploy out of Afghanistan.
For the future, the company's focus will be on the revival of the
business jet market (Gulfstream) along with programs such as the
Warfighter Information Network Tactical (WIN-T) program and Joint
Tactical Radio System (JTRS) in the IS&T division.
Similarly, the Combat Systems and Marine Systems segments will
receive a boost from higher volumes in the U.S. military vehicle
business (Stryker combat vehicles and Abrams tanks) and ship
programs DDG-51, Virginia class submarines and the Mobile Landing
Platform program.
General Dynamics' total order backlog steadily decreased to $55.2
billion at the end of the first quarter of 2012 from $59.6 billion
at fiscal-end 2010. Going forward, the U.S. economic fundamentals
are basically being kept on a leash as the Euro-crisis continues to
cast its spell over the financial markets, keeping risks of further
cutbacks in future defense budgets at a high level. Our
apprehension is fueled by $15 trillion of national debt and an
unemployment rate hovering around 8.1% which would lead to the
Budget Control Act's dictum of automatic cutbacks across the board
going forward.
Going by the pulse of the economy and the pros and cons, we prefer
to maintain our long-term Neutral recommendation on the stock.
Moreover, General Dynamics holds a Zacks #3 Rank that translates
into a short-term Hold rating.
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