General Dynamics Wins $432M Virginia-Class Submarine Deal

General Dynamics Corp.’s (NYSE:GD) business division, Electric Boat, recently secured a modification contract for providing fiscal 2018 lead yard services and development studies and design efforts for Virginia-class submarines. Majority of the work related to this deal will be carried out in Groton, CT.

Details of the Deal

Valued at $432 million, the contract was awarded by the Naval Sea Systems Command, Washington, D.C. Per the modification, the lead yard services will maintain, update, and support the Virginia-class design and related drawings and data for Virginia-class submarines. This will include technology insertion, throughout its construction and post shakedown availability period.

Moreover, the company will provide engineering and related lead yard services necessary for direct maintenance and support of Virginia-class ship specifications. In addition, this contract will offer development studies and design efforts related to 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.

Development studies and design efforts will also be supplied in relation to components and systems to accomplish research and development tasks and prototypes and engineering development models required to evaluate new technologies to be inserted in succeeding Virginia-class submarines.

Fiscal 2018, 2017, 2012, 2015, 2013, 2014 and 2016 shipbuilding and conversion (Navy) funds, as well as fiscal 2018 and fiscal 2017 research, development, test and engineering funds will be utilized to complete the task by December 2018.

A Brief Note on Virginia-Class Submarine

The Virginia-class submarine program is a class of nuclear-powered fast-attack submarines 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. (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. Valued at 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. With widespread geo-political tensions looming over the globe, nations are strengthening up their arsenals and boosting up their naval power through upgrading submarines is one such strategy.

In line with this, considering the solid demand for the Virginia-class submarine, the U.S. Navy plans to build an advanced model of this submarine in the subsequent years. This latest model 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 earlier 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 company’s growth trajectory.

Further, the Navy has acknowledged the Virginia-class program as one of its top priority, and a sumptuous budget has been allotted for 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.

Defense Industry Scenario

In September, the U.S. Senate approved a $700-billion National Defense Authorization Act, which provides necessary funding to the U.S. Military to carry out activities in homeland and overseas. The bill authorizes $640 billion for national defense spending and $60 billion for Overseas Contingency Operations.

The defense expenditure for fiscal 2018 is expected to exceed fiscal 2017 levels by nearly $83 billion. The defense spending approved by the Senate is higher than what President Trump had requested for. This has raised the growth prospects of defense primes like The Boeing Company (NYSE:BA) and Lockheed Martin Corp. (NYSE:LMT) .

In addition, the bill includes $6 billion to boost Navy shipbuilding. This would benefit the nation’s prime shipbuilders like General Dynamics and Huntington Ingalls.

Price Performance

General Dynamics’ stock has returned 12% over a year, underperforming the 28.4% rally of the industry it belongs to. This may have been caused by the earlier budget cuts inflicted by the prior U.S. government.

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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