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GD in $12.8M Modified Contract

Zacks Equity Research

Electric Boat, a wholly owned subsidiary of General Dynamics Corporation (GD), has received a contract modification to continue the development of the Common Missile Compartment for the U.S. Ohio Replacement Program and the United Kingdom's Successor ballistic-missile submarine. The contract is worth $12.8 million.

Per the contract, the company will be responsible for procurement of prototype material and equipment that is required for the production of the Common Missile Compartment.

Originally, the company had received the contract in Dec 2008 for engineering, technical services, concept studies and design of a Common Missile Compartment for the next-generation ballistic missile submarines being developed for the U.S. Navy and the Royal Navy. The contract provided options, which if exercised, would bring the contract value to $776 million.

Recently, in Jan 2013, the company received a contract to perform research and development work for the next-generation strategic deterrent submarine under the Ohio Replacement Program. Simultaneously, the company also was supposed to continue the development of Common Missile Compartment for Ohio Replacement submarines and the UK Successor-class ballistic-missile submarine. Common Missile Compartment is jointly owned by the U.S. Navy and Royal Navy. Prior to that in November 2012, the company had received a contract for the same.

The current contract brings the contract value to more than $770 million. The contracts are received as a result of the company’s proven technical capabilities. The employees working under this contract covers all aspects of the submarine life cycle, which includes concept formulation and design through construction, maintenance and modernization, and finally inactivation and disposal.

Based 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.

General Dynamics’ revenue exposure is spread over a broad portfolio of products and services in business aviation that allows it to keep the overall growth momentum steady. Key growth drivers for the company include improving business jet market, stable business of U.S. military vehicles and strong cash flow generation.

On Jan 23, 2013, General Dynamics is expected to release its fourth quarter and full year 2012 results.  The Zacks Consensus Estimates for fourth quarter 2012 and full year 2012 are currently at $1.92 per share and $6.97 per share, respectively.

Like all defense majors, the future prospects of the company are tied to the U.S. defense budget.  With the possibility of a cut in the defense budget, the company presently retains a short-term Zacks Rank #3 (Hold) that corresponds with our long-term Neutral recommendation on the stock.

Some of its main competitors are Lockheed Martin Corporation (LMT), Northrop Grumman Corporation (NOC) and Huntington Ingalls Industries, Inc. (HII).

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