General Dynamics Wins $341M Contract for Nuclear Submarines

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General Dynamics Corp. 's GD subsidiary, Electric Boat Corp., has clinched a $341.2 million modification contract to exercise the option for design agent, planning yard, engineering and technical support for in-service nuclear submarines. Notably, the deal has been awarded by the Naval Sea Systems Command, Washington, D.C.

About the Contract

Electric Boat will provide drawings and associated technical data, design change documentation, logistics technical data, configuration management as well assubmarine safety design review.

The contractor will also offer hull, mechanical and electrical engineering, non-propulsion plant electrical system engineering, propulsion plant engineering, besides maintenance engineering.

In addition, this subsidiary will give refit/availability technical support, on-site support, configuration change program design and installation support, configuration change program material support and submarine technical trade support.

These apart, the company will also support training and facility, research, development, test and evaluation program, research and development of submarine/submersibles, miscellaneous special studies, temporary alteration support, modernization of submarine/submersible systems/subsystems and affordability/cost reduction technical support. Markedly, the dealincludes foreign military sales (FMS) to Spain.

While majority of the work will be performed at Groton, CT, the rest will be performed at a few other places across the United States. It will be completed using FMS and fiscal 2017 shipbuilding and conversion (Navy) as well as fiscal 2017 other procurement (Navy) fundsby September 2018.

Nuclear Submarines and the United States

To counter the rising geopolitical tensions across the world, the U.S. government has been designing submarines for decades. In 1954, the U.S. Navy was the first to launch a nuclear-powered submarine. These submarines were markedly better than the diesel-engine ones that had to make multiple stops for refueling. Currently, the U.S. Navy has three classes of nuclear-powered attack submarines - Virginia-class, Ohio-class and Los Angeles-class.

Notably, the market for nuclear submarine is a consolidated one in the United States, operated by two prime players like General Dynamics and Huntington Ingalls Industries, Inc. HII . As a result, both the companies enjoy a large share of the market and high profit margins.

In this context, it is imperative to mention that recently the U.S. administration has been allotting significant provision for nuclear submarines in the nation's defense budget, thereby encouraging submarine-manufacturers in boosting their production. Evidently, the fiscal 2017 budget proposal allocated $8.1 billion for submarines.

Our View

General Dynamics enjoys a dominant position as a Navy contractor. This is because it is one of the only two contractors in the world equipped to build nuclear-powered submarines. The company is also a prime contractor for the development of Columbia-class submarines and Virginia-class submarines.

Given the Navy's recent acknowledgement of the nuclear submarines as its top priority and the huge budget allotted to the same, the modification contract will undoubtedly render the company a leading position in the nuclear-powered submarine industry.

Recently, the U.S. Senate Armed Services Committee approved fiscal 2018 defense policy bill. The National Defense Authorization Act for fiscal 2018, worth $700 billion, includes $25 billion to boost Navy shipbuilding. Going forward, the bill is anticipated to boost revenue growth for General Dynamics, which is one of the prime shipbuilders in the United States.

Price Movement

Shares of General Dynamics have surged 31.9% in a year, underperforming the industry 's gain of 43.7%. This downturn might have been caused by the earlier budget cuts inflicted by the U.S. government in the defense space.

Zacks Rank

General Dynamics carries a Zacks Rank #3 (Hold). Better-ranked stocks in the same space include Leidos Holdings, Inc. LDOS and Northrop Grumman Corporation NOC . While Leidos Holdings sports a Zacks Rank #1 (Strong Buy), Northrop Grumman holds a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here .

Leidos Holdings delivered an average positive earnings surprise of 18.01% in the last four quarters. The Zacks Consensus Estimate for current-year earnings inched up 0.3% in the last 30 days.

Northrop Grumman pulled off an average positive earnings surprise of 12.60% in the last four quarters. Its 2017 earnings estimates inched up 0.2% in the last 30 days.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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