General Dynamics Up on U.S. Navy Deal - Analyst Blog

General Dynamics Corporation's GD share price edged up roughly 0.7% to $108.41 on Mar 17, 2014 from Friday's closing price. The share price increased primarily due to the $642.6 million contract, which the company received from the U.S. Navy on Mar 14.

The contract calls for General Dynamics to build an Arleigh Burke-class destroyer, under the DDG 51 ship category, for the U.S. Navy. The company will construct a total of three DDG 51 ship, including the current one.

General Dynamics' business wing Bath Iron Works will handle this project. The company will roll out the services from its facilities at the Bath and South Portland, ME; Cincinnati, OH; Walpole, MA; York, Coatesville and Erie, PA; Charlottesville, VA; and several other locations. The deliveries are expected to be completed by July 2023.

Currently, General Dynamics is constructing two DDG 51 destroyers - Rafael Peralta and Thomas Hudner. The deliveries are scheduled to start by 2016 and 2017, respectively.

Steel bodied and gas turbine propulsion DDG 51 Arleigh Burke-class features advanced anti-submarine warfare system, AEGIS combat system, the Vertical Launching System, two embarked SH-60 helicopters, advanced anti-aircraft missiles and Tomahawk anti-ship and land-attack missiles. These features make the destroyer a powerful surface combatant positioned in sea.

In addition, the DDG 51 multi-mission guided missile destroyers offer a whole range of anti-surface, anti-submarine and anti-air capacities to carrier battle groups, surface action groups, amphibious groups and replenishment groups.

The aforesaid positive factors propelled the U.S Navy to obtain nine DDG 51 class destroyers within a time span of 2014 to 2018, as per the Navy's 2014 budget dated Feb 4, 2014. Increased demand for the DDG 51class destroyers is expected to ensure stable future cash inflow for General Dynamics.

It is evident from the order book that General Dynamics has a strong relationship with the U.S. Navy and gets orders at regular intervals. On March 11, 2014, the company's Electric Boat unit received a contract, worth $57.2 million, from the U.S. Navy. Per the agreement, General Dynamics will organize and execute maintenance work on a Virginia-class attack submarine called the USS Minnesota (SSN-783).

General Dynamics' effort towards keeping its commitments in terms of maintaining product and service standard along with delivery timing will enable it to receive domestic as well as international contracts frequently, thereby improving its revenue stream.

Though General Dynamics' Marine Systems division receives contracts at regular intervals, we remain concerned about the segment's performance as it contributed less to fourth-quarter 2013 earnings. In addition, the company's total backlog in the fourth quarter decreased 10.3% year over year to $46 billion.

General Dynamics currently has a Zacks Rank #3 (Hold). However, some better-ranked stocks in the same industry include Huntington Ingalls Industries, Inc. HII, Wesco Aircraft Holdings, Inc. WAIR and Lockheed Martin Corp. LMT. While Huntington Ingalls and Wesco Aircraft Holdings hold a Zacks Rank #1 (Strong Buy), Lockheed carries a Zacks Rank #2 (Buy).