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General Dynamics Wins $4B Navy Deal to Build 4 DDG 51 Ships

Zacks Equity Research

General Dynamics Corp.’s GD business unit, Bath Iron Works (BIW), recently secured a multi-year contract for manufacturing four DDG 51 class ships. Work related to the deal is scheduled to be completed by June 2028.

Details of the Deal

Valued at $3.9 billion, the contract was awarded by the Naval Sea Systems Command, Washington, D.C. Per the terms of the deal, Bath Iron may also provide engineering change proposals, design budgeting requirements and post-delivery availabilities. On execution of these options, the cumulative value of the contract will reach $4 billion.

The deal also boasts provisions for producing additional DDG 51 class ships. Majority of the work will be executed in Bath, ME. The company will utilize fiscal 2018 shipbuilding and conversion (Navy) fund to finance the task.

A Brief Note on DDG-51

The DDG 51 Arleigh Burke-class is a multi-mission warship. It features an advanced anti-submarine warfare system, the AEGIS combat system, the Vertical Launching System, two embarked SH-60 helicopters along with advanced anti-aircraft missiles and land-attack missiles. Impressively, the warship offers protection against a wide range of threats, including ballistic missiles.

What’s Favoring General Dynamics?

General Dynamics has been serving the U.S. Navy, constructing and delivering next-generation combat-proven ships for decades. Being the Navy's primary surface combatant, the Aegis-equipped Arleigh Burke class (DDG 51) destroyers enjoys solid demand. Such solid demand positions General Dynamics at an advantageous position in the shipbuilding business, with the company being the lead designer and builder of DDG 51.

In second-quarter 2018, the company’s Marine Systems, which builds combat ships, witnessed revenue growth of 4.3% on a year-over-year basis. We may expect the latest contract win to add impetus to this segment’s growth in the third quarter as well.

Furthermore, President Trump’s proposed fiscal 2019 defense budget includes an investment plan of $179.1 billion for the U.S Navy. In particular, this investment comprises $6 billion spending provision for procuring 3 DDG 51s compared with $4 billion allotted in the budget a year ago. Considering such favorable budgetary revisions, General Dynamics, a prominent shipbuilder in the United States, is expected to win similar contracts from the U.S. Navy in the coming days.

Price Movement    

In a year’s time, shares of General Dynamics have lost 1.9% against the industry’s 22.4% rally. The underperformance may have been caused by intense competition that the company faces in the aerospace-defense space.

Zacks Rank & Key Picks                                   

General Dynamics currently carries a Zacks Rank #3 (Hold). A few better-ranked stocks in the same sector are Aerojet Rocketdyne Holdings AJRD, Engility Holdings EGL and Huntington Ingalls Industries HII. While Aerojet Rocketdyne sports a Zacks Rank #1 (Strong Buy), Engility and Huntington Ingalls carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Aerojet Rocketdyne came up with an average positive earnings surprise of 9.27% in the trailing four quarters. The Zacks Consensus Estimate for 2018 earnings moved up 30.9% to $1.27 over the last 90 days.

Engility Holdings delivered an average positive earnings surprise of 19% in the preceding four quarters. The Zacks Consensus Estimate for 2018 earnings climbed 16.1% to $2.02 over the last 90 days.

Huntington Ingalls pulled off an average positive earnings surprise of 9.48% in the trailing four quarters. The Zacks Consensus Estimate for 2018 earnings moved 6.4% north to $17.24 over the last 90 days.

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