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US & UK Navy Award GD $61.7M Deal

Zacks Equity Research

General Dynamics Corporation’s (GD) business unit General Dynamics Electric Boat has received a contract modification worth $61.7 million to continue the development of U.S. Navy’s Common Missile Compartment for the United Kingdom's Successor ballistic-missile submarine and the U.S. Ohio replacement submarine. The contract has a total value of more than $776 million, if all the options are exercised and funded.

Per the current contract, the company will procure, manufacture and test prototype material and equipment that will be used in the manufacture of the Common Missile Compartment.

The deal is an extension of the contract received by the company in October 2008. Under the contract, the company had to look after the engineering, technical services, concept studies and design of a Common Missile Compartment for the next-generation ballistic missile submarines that was developed for the Royal Navy and the U.S. Navy.

After 2008, the company had been making contract modifications with respect to the original contract. In December 2011, it received a $191.3 million contract modification for concept studies, engineering and design of a Common Missile Compartment for the U.K. and U.S submarines. The overall contract had a value of more than $708 million, provided all options are exercised and funded.

Due to its proven technical capabilities, maintenance and modernization, and its ability of concept formulation and design through construction, Electric Boat has been receiving a number of submarine contracts. Recently, the segment received a $459 million contract modification to provide planning yard work and engineering and technical support for nuclear submarines.

Recently, General Dynamics Corporation announced its third-quarter 2012 earnings results. Operating earnings of $1.70 per share fell short of the Zacks Consensus Estimate by $0.07. It also missed the year-ago figure by 7.1%. General Dynamics generated total revenue of $7.93 billion in the reported quarter versus $7.85 billion in the year-ago quarter, reflecting a paltry growth of 1%.

Going forward, continuous flow of these contracts would generate unhindered revenue for the company. Moreover, General Dynamics’ revenue exposure that is spread over a broad portfolio of products and services in business aviation; combat vehicles, weapons systems and munitions; shipbuilding design, repair and construction; and information systems, technologies and services will keep the overall growth momentum steady.

However, like all defense majors like Northrop Grumman Corporation (NOC) and Lockheed Martin Corporation (LMT), the future prospects of the company are tied to the U.S. defense budget. Also, we are concerned about the 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.

Based in Falls Church, Virginia, General Dynamics Corporation is engaged 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.

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