GD Wins Virginia Submarine Contract

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General Dynamics Electric Boat, a subsidiary of General Dynamics Corporation (GD), has received a $6.8 million contract modification for designing and procurement of a common controller for various shipboard functions on Virginia-class submarines.

This modification contract is a part of an overall engineering contract supporting the Virginia-class submarine program. In July 2010, the company had received a $171.8 million contract to provide lead-yard services for Virginia-class nuclear-powered attack submarines from the U.S. Navy. Per the contract, the company had to look after the maintenance and update of design drawings and data for each Virginia-class submarine. If all options are exercised and funded, the contract would have a potential cumulative value of $881 million through 2014.

The Virginia-class submarine program is a class of nuclear-powered fast attack submarines in service with the U.S. Navy. These submarines are designed for a broad spectrum of open-ocean and littoral missions. Moreover, they are less costly than Seawolf class attack submarines. Due to their technical excellence and schedule performance, they assist the Navy in dominating both the open ocean and the littorals.

In partnership with the Navy, Electric Boat has been successfully pursuing its goal to reduce ship costs while focusing on improvement in overall efficiency. In April this year Electric Boat also received a contract worth $78 million from the U.S. Navy for supplying long lead-time material for the Virginia-class submarine SSN-792.

Based in Falls Church, Virginia, General Dynamics is engaged in mission-critical information systems and technologies; land and expeditionary combat vehicles, armaments and munitions; shipbuilding and marine systems; and business aviation. It is well equipped to build nuclear-powered submarines in the U.S. With its diversified revenue exposure, we expect to keep the overall growth momentum steady.

However, we are concerned as the company is largely tied to the U.S. defense budget, where the threat of budget cuts is high. Also, we have turned slightly cautious about the risks related to the execution of key projects.

Like Textron Inc. (TXT) and The Boeing Company (BA), the company presently retains a short-term Zacks #3 Rank (Hold) that corresponds with our long-term Neutral recommendation on the stock.

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