General Dynamics Wins $115M Virginia-class Submarine Deal

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Defense behemoth, General Dynamics Corp. 's GD business division, Electric Boat, recently secured a modification contract to offer additional lead-yard services, development studies and design efforts in support of the Virginia-class submarines.

Work related to this deal is scheduled to be over by October 2017.

Details of the Deal

Valued at $115.3 million, this contract has been awarded by the Naval Sea Systems Command, Washington, D.C. While majority of the work will be carried out in Groton, CN, the rest will be performed in Newport and Quonset Point, RI.

Notably, the deal will use fiscal 2011, 2012, 2013, 2014, 2015, 2016 and 2017 shipbuilding and conversion (Navy) and fiscal 2016 and 2017 research, development, test and evaluation (Navy) funding to complete the work.

Per the modification, Electric Boat will provide lead-yard services for the nuclear submarines. This, in turn, will sustain, update and support the Virginia-class design and associated drawings as well as data for each submarine, along with technology insertion throughout its construction and post-shakedown availability period.

The company will also provide all engineering and related lead-yard services required for direct maintenance and support of Virginia-class ship specifications. Moreover, this contract offers development studies and design efforts in connection with the Virginia-class submarine design and design improvements, preliminary and detail component and system design, integration of system engineering, design engineering, test engineering, logistics engineering and production engineering.

Meanwhile, Electric Boat will continue development studies and design efforts associated with components and systems to complete research and development tasks and prototypes, and engineering development models essential to fully assess new technologies to be inserted in succeeding Virginia-class submarines.

A Brief Note on Virginia-Class Submarine

The Virginia-class submarine program is a class of nuclear-powered fast-attack submarines (SSNs) 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 Inc. 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.

What's Favoring General Dynamics?

As one of the only two contractors in the world that are 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.

Going forward, 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). We believe the launch tubes of VPM will have the capability to carry a total of 28 additional Tomahawk cruise missiles.

In fact, the Navy has already proposed fiscal 2017 budget requests worth $97.9 million in research and development funding for the VPM. This indicates additional defense contracts for General Dynamics, which, in turn, is expected to boost the corporation's 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 as it is the prime contractor. As a result, we believe that the modification contract will undoubtedly put the company in a leading position in the nuclear-powered submarine industry.

Price Movement

Shares of General Dynamics's have rallied about 31.1% in the last one year, underperforming the industry 's gain of 35.1%. This could be because the company derives a major portion of its revenues from government orders and any further budget cut in the U.S will likely hurt the company's growth prospects. Moreover, the stock's performance also lagged compared to its peers like Boeing Company BA and Engility Holdings, Inc. EGL , which also outperformed the industry.

Zacks Rank

General Dynamics currently carries a Zacks Rank #3 (Hold). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

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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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