General Dynamics' Unit Wins $104M Submarine Manufacturing Deal

Zacks Equity Research
·3-min read

General Dynamics Corp.’s GD Mission Systems unit recently secured a $104.2-million contract for the development, production and installation of Columbia (US01) and Dreadnought-class ballistic missile submarine. The contract was awarded by the Strategic Systems Programs, Washington, D.C.

Majority of the work related to the deal will be performed in Pittsfield, MA, and is scheduled to be completed by November 2024.

Importance of the Columbia and Dreadnought-Class Submarines

The U.S. Navy is expected to receive 12 Columbia-class submarines, which will replace its Ohio-class submarines. These new submarines, equipped with advanced warfare technologies, will support the U.S. strategic deterrent mission, as the SSBN fleet of the U.S. Navy carries 70% of the nation’s operational nuclear weapons.

The Dreadnought-class submarines will replace the four existing Vanguard-class SSBNs to maintain continuous at-sea deterrence (CASD). Following the completion, the Dreadnought-class submarine will become the largest and the most-equipped submarine for the United Kingdom's Royal Navy.

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 geopolitical tensions. In this backdrop, General Dynamics enjoys a dominant position as a Navy contractor, as the global demand for submarines remains high. In fact, the company is one of the only two contractors in the world equipped to build nuclear-powered submarines.

Furthermore, the fiscal 2021 defense budget proposal includes a spending provision of $4.4 billion specifically for Columbia-class submarines, reflecting a massive surge of 100% from the investments provisioned in the fiscal 2020 budget. Such a stupendous budgetary amendment reflects solid growth prospects for the company in the days ahead.

Per a report by Research and Markets firm, the global submarine market is expected to see a 4% CAGR from 2020 to 2025. This indicates increased demand for different variants of submarines, including the Columbia-class and Dreadnought-class submarines. As submarines are a vital part of the U.S. navy fleets, General Dynamics is likely to benefit from such favorable market trends. Such favorable trends should also benefit other submarine makers like Huntington Ingalls HII and MitsuBishi Heavy Industries MHVYF around the world.

Price Movement

General Dynamics’ stock slipped 7.1% in the past year compared with the industry’s decline of 16.9%.

Zacks Rank & A Key Pick

General Dynamics currently carries a Zacks Rank #3 (Hold). A better-ranked stock in the same sector is CAE Inc. CAE, which holds a Zacks Rank #2 (Buy).  You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

CAE delivered a positive earnings surprise of 3.48%, on average, in the trailing four quarters. The company has a long-term earnings growth rate of 8%.

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