General Dynamics' Unit Wins Missile Submarine Support Deal

Zacks Equity Research
·3-min read

General Dynamics Corp.’s GD Electric Boat division recently secured an $869-million modification contract for providing designing and engineering support to the Columbia Class fleet ballistic missile submarines (SSBNs). The deal also includes submarine industrial base development and expansion efforts supporting Columbia SSBNs and the nuclear shipbuilding enterprise (Virginia class and Ford class).

The deal is a joint U.S. and U.K. program that has been awarded by the Naval Sea Systems Command, Washington, D.C.

Furthermore, the deal entails Electric Boat for the construction of SSBN 826 and SSBN 827 submarines. Work is scheduled to get completed by December 2031 and will be performed in Groton, CT; Quonset Point, RI; and Newport News, VA, alongside other locations across the United States.

Importance of the Deal

The recently acquired contract will enhance cyber security measures alongside improving sub-tier vendor stability based on production economies for major components. This will subsequently help in reducing risks related to the Columbia, Virginia and Ford class nuclear shipbuilding programs. Further, to support the increased demand associated with the U.S. Navy’s force structure assessment, the nuclear shipbuilding industrial base is significantly ramping up production capabilities. We believe that this contract, involving the expansion of the submarine industrial base, will duly go on to support the company's production ramp-up 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 geopolitical tensions. In this backdrop, General Dynamics enjoys a dominant position as a Navy contractor, as the 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 the 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 ballistic missile submarines. As submarines are a vital part of the U.S. navy fleets, General Dynamics is likely to benefit from such favorable market trends. These trends should also benefit other submarine makers like Huntington Ingalls HII and MitsuBishi Heavy Industries MHVYF around the world.

Price Movement

General Dynamics’ stock dropped 14% in the past year compared with the industry’s decline of 26.5%.

Zacks Rank & A Key Pick

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

Embraer delivered a positive earnings surprise of 14.93% in the trailing quarter. The company has a long-term earnings growth rate of 17%.

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