General Dynamics' Unit Wins $22B Submarine Construction Deal

General Dynamics Corp.’s (NYSE:GD) Electric Boat division recently secured a $22.2-billion multi-year modification contract for manufacturing nine Virginia-class submarines, of which eight would include the Virginia Payload Module (VPM). The deal has been awarded by the Naval Sea Systems Command, Washington, D.C.

Details of the Deal

Per the deal, General Dynamics’ Electric Boat division will work with Huntington Ingalls Industries’ (NYSE:HII) Newport News Shipbuilding division for the construction of the fifth block of Virginia-class submarines. The modification also includes design support, delivery of spare materials and tests required for each submarine.

Majority of the work related to the deal will be performed in Newport News, VA; Groton, CT; along with other locations across the United States and is expected to be completed by August 2029, without exercising any options.

Recent Developments in Virginia-class Submarine

General Dynamics is the lead contractor of the Virginia-class submarine program, which was its largest program in 2018 and the largest contract in its backlog. The company’s Marine Systems segment that manufactures these submarines had a year-end backlog that included $8.8 billion for 11 Virginia-class submarines, scheduled for delivery through 2023.

In recent times, General Dynamics has been able to substantially reduce the cost and delivery time for these submarines from 84 months to 66 months, alongside improving mission capability and ship construction quality. Moreover, the company efficiently strives to develop the VPM for the fifth block of Virginia-class submarines, which would provide significant upgrades in size and performance, supporting the Navy’s fleet plans. Such technical upgrades might have encouraged Pentagon to award Huntington Ingalls with the latest contract.

It is already a known fact that the United States is strategically strengthening its naval power by upgrading missile submarines, due to its rising cross-border tiff with several nations, including Russia and North Korea. Hence, General Dynamics has been increasingly acquiring contracts related to the Virginia-class submarine.

Price Performance

Shares of General Dynamics have gained 15.2% year to date compared with the industry’s growth of 28.4%.

Zacks Rank & Key Picks

General Dynamics currently carries a Zacks Rank #3 (Hold).

A few better-ranked stocks in the same space are Leidos Holding (NYSE:LDOS) and Northrop Grumman Corp. (NYSE:NOC) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Leidos Holding’s long-term growth estimates currently stand at 7.5%. The Zacks Consensus Estimate for 2019 earnings has increased 4.65% to $4.96 in the past 60 days.

Northrop Grumman’s long-term growth estimates currently stand at 13.10%. The Zacks Consensus Estimate for 2019 earnings has risen 3.7% to $20.38 in the past 60 days.

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