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General Dynamics (GD) Wins $2B Submarine Modification Deal

Zacks Equity Research

General Dynamics Corp.’s GD Electric Boat division recently secured a $2-billion modification contract in relation to the Virginia-class submarines. The deal has been awarded by The Naval Sea Systems Command, Washington, DC.

The contract involves long lead time materials and economic ordering quantity, in connection to fiscal 2019-2023 Virginia-class submarines. Work related to the deal will get executed in Sunnyvale, CA, along with several other locations across the country. General Dynamics will also utilize fiscal 2019 and 2018 shipbuilding and conversion (Navy) funds for completing the task.

Recent Developments on the Virginia-Class Submarines

General Dynamics is the lead contractor of the Virginia-class submarine program, which was its largest program in 2018 and the largest contract in its backlog. The company's Marine Systems segment that manufactures these submarines had a year-end backlog that included $8.8 billion for 11 Virginia-class submarines, scheduled for delivery through 2023.

Since the delivery of the lead Virginia-class submarine, General Dynamics has substantially reduced the cost and delivery time for these submarines from 84 months to 66 months alongside improving mission capability and ship construction quality. Moreover, the company is also developing the Virginia Payload Module (VPM) for the fifth block of Virginia-class submarines, scheduled to begin construction in 2019 in support of the Navy’s fleet plans providing significant upgrades in size and performance.

What Favors General Dynamics?

General Dynamics, being one of the only two contractors in the world equipped to build nuclear-powered submarines, enjoys a dominant position as a Navy contractor. Moreover, the United States is strategically strengthening its naval power by upgrading missile submarines, due to the rising widespread geo-political tensions across the world.

Inevitably, demand for its technical expertise and other support services required for the proper functioning of submarines also remain high. As a result, defense giants like General Dynamics enjoy a smooth flow of contracts, like the latest one.

Looking Ahead

Per a report by Market Research Future firm, the global submarine market is expected to showcase a CAGR of 4.24% from 2018 to 2023. Such projections, going forward, will not only increase the submarine production demand but also lead to a rise in regular system modifications and upgrades of different submarine variants. As submarines are a vital part of the U.S. navy fleets imperative in combat, surveillance, counter- surveillance and other missions, we may expect General Dynamics to benefit significantly, in the days ahead.

Price Performance

Shares of General Dynamics have plunged about 23.8% in a year compared with the industry’s decline of 5.4%.

Zacks Rank & Key Picks    

General Dynamics currently carries Zacks Rank #3 (Hold). A few better-ranked stocks in the same sector are The Boeing Company BA, Spirit Aerosystems Holdings SPR and Heico Corporation HEI.

While Boeing and Spirit Aerosystems sport a Zacks Rank #1 (Strong Buy), Heico carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Boeing came up with average positive earnings surprise of 17.08% in the last four quarters. The Zacks Consensus Estimate for 2019 earnings has risen 11.3% to $20.13 in the past 90 days.

Spirit Aerosystems’ long-term growth estimates currently stand at 7.80%. The Zacks Consensus Estimate for 2019 earnings has risen 3% to $7.56 in the past 90 days.

Heico Corporation’s long-term growth estimates currently stand at 12.10%. The Zacks Consensus Estimate for 2019 earnings has risen 5.4% to $2.14 in the past 90 days.

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