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General Dynamics Wins $497M Submarine Expansion Support Deal

Zacks Equity Research

General Dynamics Corp.’s GD Electric Boat division recently secured a $497-million modification contract for developing and expanding a submarine industrial base. The deal has been awarded by the Naval Sea Systems Command, Washington, D.C.

Details of the Deal

Per the contract, Electric Boat will work on expanding a submarine industrial base to support the Columbia-class fleet ballistic missile submarines, and the nuclear shipbuilding enterprise that includes the Virginia class and Ford class submarines.

Work is scheduled to get completed by December 2031 and will be performed in Groton, CT; Quonset Point, RI; and Newport News, VA.

Importance of the Deal

The recently acquired contract will improve sub-tier vendor stability based on production economies for major components. This will subsequently help in reducing risk related to the Columbia, Virginia and Ford class submarine programs. Further, to support the increased demand associated with the Navy’s force structure assessment, the nuclear shipbuilding industrial base is significantly ramping up production capabilities. We believe this contract involving expansion of the industrial base to duly support the ramped-up production plans.

What Favors General Dynamics?

The United States along with many other nations is strategically strengthening its naval power by upgrading missile submarines due to the
rising worldwide geo-political tensions. In this backdrop, General Dynamics enjoys a dominant position as a Navy contractor. In fact, the company is one of the only two contractors in the world equipped to build nuclear-powered submarines.

Inevitably, demand for its technical expertise in construction of submarines and support services required for the proper functioning of these submarines, post production, remains high. The development of this submarine industrial base can be expected to boost General Dynamics’ production efficiencies and enable it to manufacture submarines at an increased pace.

Looking Ahead

Per Market Research Future firm, the global submarine market is expected to see a 4.24% CAGR from 2018 to 2023. This indicates increased demand for different variants of submarines along with services required to upgrade them, going forward. As submarines are a vital part of the U.S. navy fleets imperative in combat, surveillance, counter-surveillance, and other missions, General Dynamics is likely to benefit from such favorable market trends.

Price Performance

Shares of General Dynamics have plunged about 15.4% in a year compared with the industry’s growth of 0.1%.

Zacks Rank & Key Picks    

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

A few better-ranked stocks in the same sector are Leidos Holdings, Inc. LDOS, Lockheed Martin Corporation LMT and Northrop Grumman Corporation 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 Holdings came up with average positive earnings surprise of 6.81% in the last four quarters. The Zacks Consensus Estimate for 2019 earnings has risen 1.1% to $4.58 in the past 60 days.

Lockheed Martin came up with average positive earnings surprise of 17.35% in the last four quarters. The Zacks Consensus Estimate for 2019 earnings has increased 4.21% to $20.28 in the past 60 days.

Northrop Grumman Corporation came up with average positive earnings surprise of 18.50% in the last four quarters. The Zacks Consensus Estimate for 2019 earnings has climbed 1.85% to $19.29 in the past 60 days.

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