General Dynamics Wins Deal To Support Virginia-Class Ships

General Dynamics Corp.’s (NYSE:GD) business division — Electric Boat — recently clinched a modification contract for developing air conditioning unit component, which will be incorporated in Block V Virginia class boats. Work related to the deal is scheduled to be completed by September 2022.

Details of the Deal

Valued at $16.6 million, the contract was awarded by the Supervisor of Shipbuilding Conversion and Repair, Groton, CT. Per the terms, Electric Boat will procure prototype material and manufacturing for the aforementioned air conditioning units.

Majority of the work will be carried out in York, PA. Fiscal 2018 research, development, test and evaluation (Navy) funding will be utilized to partially finance this contract.

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. (NYSE:HII) .

Also, intelligence, surveillance and reconnaissance operations as well as mine warfare are managed by these vessels. In fact, the Virginia-class is 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.

Notably, Electric Boat is the prime contractor for the Virginia-class submarine program. This division continues to operate at a two submarines-per-year construction rate and has delivered 15 Virginia-class submarines as of 2017-end, in conjunction with Huntington Ingalls. Impressively, since the delivery of the lead Virginia-class submarine, the cost and time to deliver follow-on ships has been reduced consistently from 84 months to 66 months, while improving the mission capability and quality of the ships at the time of delivery.

The remaining 13 submarines are scheduled for dispatch through 2023. This reflects that the company has opportunities to win more such contracts like the latest one, which in turn, will provide impetus to its growth story.

Furthermore, the Navy has acknowledged the Virginia-class program as one of its top priority, and a sumptuous budget has been allotted for the same. Evidently, the fiscal 2019 defense budget proposal for the U.S. Navy includes a request for spending $58.5 billion to buy 10 new ships, including two Virginia-class submarines. This bodes well for General Dynamics as it is the prime contractor.

Going ahead, we expect the company to win more such contracts like the latest one, which in turn, should enable it to expand footprint in the nuclear-powered submarine industry.

Price Performance

In a year’s time, General Dynamics’ shares have gained 2.6% compared with the broader industry’s increase of 44%. The underperformance might have been led by the intense competition that the company faces in the aerospace-defense space.

Zacks Rank & Stocks to Consider

General Dynamics currently carries a Zacks Rank #3 (Hold). A few better-ranked stocks in the same sector are AeroVironment (NASDAQ:AVAV) and Boeing (NYSE:BA) . While AeroVironment sports a Zacks Rank #1 (Strong Buy), Boeing carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

AeroVironment delivered an average positive earnings surprise of 147.43% in the last four quarters. The Zacks Consensus Estimate for fiscal 2019 earnings rose by 10 cents to $1.00 in the past 60 days.

Boeing pulled off an average positive earnings surprise of 29.51% in the last four quarters. The Zacks Consensus Estimate for 2018 earnings moved north by 56 cents to $14.61 in the past 60 days.

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