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GD in $97M Ammo & Cartridge Deal

Zacks Equity Research

General Dynamics Corporation’s (GD), unit General Dynamics Ordnance and Tactical Systems has received three contracts for ammunitions and cartridges worth $97 million from the U.S. Army Contracting Commands, Picatinny Arsenal, New Jersey, and Rock Island, Ill.

Per the contract, the company will manufacture and deliver 120mm M865 and M1002 tank training ammunition, 105mm M1130 high-explosive (“HE”) pre-formed fragmentation (“PFF”) cartridges and 155mm M795 HE projectile metal parts.

The M865 utilizes a unique cone stabilizer to limit the safety fan required for tank gunnery. It is used for the Army’s 120mm smooth-bore M256 cannon and U.S. Marine Corps’ Abrams main battle tanks. The cone stabilizer has a safety feature that restricts the overall flight range below 8 km and reduces the need for extreme range safety fans.

The M1002 Target Practice Multipurpose Tracer (TPMP-T) training cartridge supplies matched exterior ballistics to the M830A1 High Explosive Anti-Tank Multi-Purpose Tracer (HEAT-MP-T) tactical cartridge. It has a dummy air and ground switch, and is matched ballistically to the time-of-flight parameters of the M830A1. Its tailcone stabilizer also provides a safety feature that confines the overall flight range to less than 8km and therefore reduces the requirement for extreme-range safety fans.

The 105mm M1130 HE PFF ammunition is the latest addition to the Army's 105mm ammunition category and is used as ammunition for the M119 towed howitzer. It has a PFF warhead that is far more lethal in comparison to the current 105mm HE projectiles. The incorporation of tungsten wires into the projectile body walls leads to the PPF effect. The projectile is also equipped with a grommet and a lifting plug to protect the rotating band.

The M795 is a 155mm HE projectile. It has greater efficiency and covers a longer range when compared to the M107. This high-explosive/high-fragmentation artillery projectile is used in combination with the M109A6 Paladin self-propelled howitzer and the M777 and M198 towed howitzers.

General Dynamics expects to complete the supply and delivery of 155mm artillery ammunition in February 2013, 105mm artillery ammunition by April 2014 and 120 tank ammunition by September 2016.

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. It is the leading tank and artillery ammunition producer providing high-performance ammunition to U.S. armed forces.

General Dynamics’ revenue exposure is spread over a broad portfolio of products and services in business aviation; combat vehicles, weapons systems and munitions; shipbuilding design, that helps in keeping the overall growth momentum steady. Other key drivers of growth include its improving business jet market, and its stable U.S. military vehicles business.

However, we are concerned due to the threat of budget cuts and risks related to the execution of key projects. The company presently retains a short-term Zacks #3 Rank (Hold) that corresponds with our long-term Neutral recommendation on the stock. Some of its main competitors are Lockheed Martin Corporation (LMT) and Textron Inc. (TXT).

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