General Dynamics Corp.'s (NYSE:GD) business division, Electric Boat, recently announced that it has been awarded a modification contract to redesign the main propulsion machinery (MPM) control systems of Virginia Class from the U.S. Navy.
Contract Details
Valued at $40.7 million, the contract requires Electric Boat to undertake necessary planning and execution efforts and will procure long lead time material which will be capable of replacing the MPM control systems or the main propulsion unit along with the ship service turbine generator set.
All work related to the deal will be carried out at the company’s Sunnyvale, CA facility. Electric Boat expects the work to be completed by May, 2020. At the time of the award, the company will be obligated with $20.3 million funds.
Earlier this month, the company secured another modification contract worth $115 million. Per the agreement, the company will provide additional lead-yard services, development studies and design efforts in support of the Virginia-class submarines. (Read More: General Dynamics Wins $115M Virginia-class Submarine Deal)
About Virginia-class submarines
Virginia-class submarines are nuclear powered fast-attack submarines (SSNs) which serves the U.S. Navy. These submarines are the result of joint efforts by General Dynamics and Huntington Ingalls Industries Inc. (NYSE: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. Each of these submarines is valued around $2.7 billion and is expected to be operational until 2070.
Why General Dynamics?
General Dynamics is one of the two companies across the globe, equipped to build nuclear-powered submarines. Therefore, the company enjoys a dominant position as a Navy contractor.
The U.S. Navy has plans to build an advanced model of Virginia-class submarines in the subsequent years which will come with an additional mid-body section called the Virginia Payload Module (VPM).
The Navy has already proposed fiscal 2017 budget requests of approximately $97.9 million for the research and development funding of the VPM. This indicates a possibility of additional defense contracts for General Dynamics.
The Navy has also said that the Virginia-class submarines are one of its top priorities. This bodes well for General Dynamics as it is the one of the prime contractor for Virginia-class submarines.
What’s in Store for Defense Space
The proposed budget hike for fiscal 2018 by President Trump reflected a 10% increase over the current base budget level of the current year, hinting at the U.S. government to spend more on defense primes like Lockheed Martin (NYSE:LMT) , The Boeing Co. (NYSE:BA) and others. More recently, the U.S. House of Representatives passed the 2018 defense policy bill, reflecting an expenditure level of $696 billion. It exceeded President Trump’s defense budget request proposed this March. If enacted, all these budgetary updates will immensely boost the business growth of all defense giants.
Price Movement
Shares of General Dynamic have returned 30.6% in the last one year compared to the industry’s return of 33.1% in the same time period.
High competition from peers and declining backlogs are some of the major concerns for the company that affects its price performance.
Zacks Ranks
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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