General Dynamics Corporation (GD) has been awarded a $51.7 million contract modification by the U.S. Navy to plan and perform the post-shakedown availability (PSA) on the nuclear submarine USS Mississippi (SSN-782). Mississippi is the ninth ship of the Virginia Class, the most advanced submarines in the world. These ships provide the Navy with advanced capabilities to retain its undersea dominance well into the 21st century.
Initially awarded in April 2012, the contract has a total potential value of $67 million. The contract includes maintenance, repairs, alterations and testing. Work will be performed at the company's Groton shipyard. Up to 400 employees will be engaged in the work, which is scheduled for completion by Dec 2013.
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.
Looking forward, key growth drivers for General Dynamics include essentially the company’s improving business of jet market, its stable business of U.S. military vehicles, a backlog (though declining) of $51.5 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 large. Also, we have turned slightly cautious about the company’s steadily dropping order backlog, and risks related to the execution of key projects.
General Dynamics’ total order backlog decreased to $51.5 billion at the end of the first nine months of 2012 from $59.6 billion at fiscal-end 2010. Going forward, the U.S. economic fundamentals are kept on a leash as the Euro-crisis continues to cast its spell over the financial markets, making further cutbacks in future defense budgets more and more likely. Our apprehension is further fueled by $15 trillion of national debt and an unemployment rate hovering around 7.9% 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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