(GD) General Dynamics Gets Submarine Contract

General Dynamics Corporation’s (GD) unit, Electric Boat Corporation was awarded a $94 million cost-plus-fixed-fee delivery order for fire restoration efforts to the damaged U.S. Navy’s Los Angeles Class attack nuclear submarine USS Miami. Earlier this year, a fire aboard the submarine damaged the vessel while it was undergoing work at the Portsmouth Naval Shipyard. The Naval Sea Systems Command, Washington, D.C., is the contracting activity.

General Dynamics, per the contract, will provide assessment and analysis, planning, material procurement, fabrication and initial installation as required to return this mission ready submarine to the fleet. This work will be done in coordination with the ongoing Engineered Overhaul being executed by Portsmouth Naval Shipyard. This contract includes a negotiated priced option which, if exercised, would bring the cumulative value of this delivery order to $100 million. Work will be performed in Portsmouth, New Hampshire; Newport News, Virginia; Groton, Connecticut; and Quonset Point, Rhode Island, and is expected to be completed by June 2013.

Looking forward, key growth drivers for General Dynamics include the improving business jet market, its stable business of U.S. military vehicles, a backlog (though declining) of over $52 billion, an ongoing share repurchase program and strong cash flow generation. However, the company is largely tied to the U.S. defense budget, where the threat of budget cut is looming. Also, we have turned slightly cautious about the company’s steadily dropping order backlog, and risks related to the execution of key projects.

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. The company operates through four segments: Information Systems & Technology (IS&T), Combat Systems, Marine Systems, and Aerospace.

General Dynamics was the third largest U.S. defense contractor in terms of revenue in fiscal 2011, after The Boeing Company (BA) and Lockheed Martin Corporation (LMT). The company is one of two contractors equipped to build nuclear-powered submarines in the U.S.

For the future, the company’s focus will be on the revival of the business jet market (Gulfstream) along with programs such as the Warfighter Information Network Tactical program and Joint Tactical Radio System in the IS&T division.

Similarly, the Combat Systems and Marine Systems segments will receive a boost from higher volumes in the U.S. military vehicle business (Stryker combat vehicles and Abrams tanks) and ship programs like DDG-51, Virginia class submarines and the Mobile Landing Platform program.

General Dynamics’ total order backlog decreased to $52.4 billion at the end of the first half of 2012 from $59.6 billion at fiscal-end 2010. Going forward, the U.S. economic fundamentals are basically being kept on a leash as the Euro-crisis continues to cast its spell over the financial markets, keeping risks of further cutbacks in future defense budgets at a high level. Our apprehension is fueled by $15 trillion of national debt and an unemployment rate hovering around 8.3% which would lead to the Budget Control Act’s dictum of automatic cutbacks across the board going forward.

Going by the pulse of the economy and the pros and cons, we prefer to maintain our long-term Neutral recommendation on the stock. Moreover, General Dynamics holds a Zacks #3 Rank that translates into a short-term Hold rating.
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