A General Dynamics Corp. (GD) unit – Electric Boat Corp. – won a $520 million sole-source undefinitized contract action, or UCA, from the U.S. Department of Defense (DoD) on Feb 4, 2013.
This latest contract is essential for the purchase of long lead-time materials for the construction of the Virginia-class nuclear fast attack submarines SSN 794, SSN 795, SSN 796, and SSN 797. Pentagon generally issues funds through these UCAs to the defense contractors for the commencement of work even prior to the signing of a final contract between the parties.
As per this UCA, General Dynamics will use these funds to pay for steam and electric plant components, as well as for work on the submarines' main propulsion units and turbine generators, along with purchases of steel, and miscellaneous hull, mechanical, and electrical system components. Work under this UCA is slated for completion by Jan 2015.
General Dynamics Electric Boat is a unit of General Dynamics Corp. and has been the prime builder of submarines for the U.S. Navy for over 100 years. General Dynamics’ joint Virginia Class submarine program with Huntington Ingalls Industries Inc. (HII) is the backbone of the U.S. Navy’s covert surveillance and reconnaissance operations under sea. The Virginia class of attack submarines is designed for a wide range of deep-sea and littoral missions. It has been the company’s most profitable defense offering and will continue to win deals from the DoD.
Despite the risk of defense budget cuts, we believe its varied product offerings will provide General Dynamics with a cushion against any loss of contracts. The company was able to exceed its 2013 earnings expectation.
However, we remain apprehensive about the company’s Marine Systems division that contributed less to its bottom line during the fourth quarter. Again, the company’s total backlog at the end of the fourth quarter was $46 billion, which declined 4% sequentially and 10.3% year over year. In the last reported quarter, orders were strong in the Aerospace group; however, delivery and lower order booking for the other segments lowered the overall backlog of the company.
General Dynamics currently has a Zacks Rank #3 (Hold). Other heavyweights in the industry include Northrop Grumman Corp. (NOC) and Lockheed Martin Corp. (LMT). While Northrop sports a Zacks Rank #1 (Strong Buy), Lockheed carries a Zacks Rank #2 (Buy).
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