(GD) General Dynamics to Acquire Metro Machine

General Dynamics Corporation (GD) has entered into an agreement to acquire Metro Machine Corp., a leading East Coast surface-ship repair company that supports the U.S. Navy fleet in Norfolk, Virginia. The acquisition is expected to be accretive to General Dynamics’ earnings in 2012.  The transaction is expected to close in November 2011. The acquisition price has not been stated.

Metro Machine Corp. is a privately held company which employs approximately 400 workers.  It has been conducting U.S. Navy ship repair and conversions since 1972.  Metro Machine Corp. is a prime contractor in Norfolk for multi-ship, multi-option (“MSMO”) contracts for combat and support ships for the U.S. Navy, including frigates (“FFG”), dock landing ships (“LSD”) and amphibious transport ships (“LPD”).  MSMO contracts provide for maintenance, modernization and repair of all ships of a class in specific homeport areas.

Metro Machine Corp. will become a part of the shipbuilding and repair operations of General Dynamics NASSCO, a business unit of General Dynamics, based in San Diego, Calif.  NASSCO, the largest shipbuilding and repair company on the West Coast, is a prime contractor for MSMO contracts for Navy combat and support ships, including FFGs, LSDs, LPDs and amphibious assault (“LHA”/”LHD”) ships.  The company employs 3,400 people.

General Dynamics was the fourth largest U.S. defense contractor in terms of revenue in fiscal 2010, following sector leaders like The Boeing Company (BA), Lockheed Martin Corp. (LMT) and Northrop Grumman Corp. (NOC).

General Dynamics’ revenue exposure is spread over a broad portfolio of products and services in business aviation; combat vehicles, weapons systems and munitions; shipbuilding design, repair and construction; and information systems, technologies and services. Diversification of revenue through exposure to a number of uncorrelated markets will keep the overall growth momentum steady. The company presently retains a short-term Zacks #2 Rank (Buy).

Looking forward, key drivers of growth for the company include a diversified revenue exposure, its stable business of U.S. military vehicles, and strong cash flow generation.

However, the company is largely tied to the U.S. defense budget, where the threat of budget cuts is looming large. Also, we have become slightly cautious about the company’s recent G650 crash and risks related to the execution of key projects. Thus over the longer run we maintain our long-term Neutral recommendation on the stock.

Headquartered in Falls Church, Virginia, General Dynamics engages in mission-critical information systems and technologies; land and expeditionary combat vehicles, armaments and munitions; shipbuilding and marine systems; and business aviation.

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