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Good News for GD, HII, LMT: $81.4B Budget Proposal for Ships

The U.S. Navy has outlined a five-year budget proposal that allocates $81.4 billion for the purchase of 38 warships, submarines and support vessels during the 2017–2021 time frame.

This plan involves the funding of approximately $14.7 billion for 7 vessels in fiscal 2017, about $16.8 billion for 8 vessels in fiscal 2018, $16.2 billion for 7 vessels in fiscal 2019, $16.9 billion for 8 vessels in fiscal 2020 and finally $16.8 billion for 8 vessels in fiscal 2021.

Yesterday Sean Stackley, Assistant Secretary for Acquisition, presented the Navy’s five-year plan to a Senate Armed Services Committee panel. The latest plan is mostly along the lines of last year’s five-year plan, except the reduction of 10 vessels, which cover the planned cutback of the Littoral Combat Ship.

Stackley separately revealed that the USS Gerald R. Ford aircraft carrier, the most expensive warship to date, will be delivered this September. Cost of the warship has been estimated to be $12.9 billion. This marks a delay of two years from the original schedule and one year from the 2014 projection.

The new plan will see the Navy financing four new frigates for a total value of $3 billion. This calls for the funding of one frigate each in fiscal 2019 and fiscal 2020, and two frigates in fiscal 2021. This forms part of a contract awarded by Defense Secretary Ash Carter and his predecessor Chuck Hagel for eight Littoral Combat Ships with better armors and a higher ability to survive. Either Lockheed Martin Corp. LMT or Austal Ltd., both of which are presently responsible for building different versions of the Littoral Combat Ship, will be awarded the contract.

Funds allocated for the replacement of the Ohio-class nuclear missile submarines have also been revised. Over the next five years, the Navy plans to spend $9.25 billion, reflecting an increase of 62.3% from the last year’s projection of $5.7 billion. This came on the heels of an allocation of $3.6 billion for fiscal 2021 to start its production. Only last week, the Navy announced that General Dynamics Corp. GD will serve as the prime contractor while Huntington Ingalls Industries Inc. HII will be the subcontractor. A contract will be awarded to General Dynamics in the latter half of this year for the submission of information for beginning production.

These figures are vital as well as reassuring for prime defense contractors like General Dynamics, Huntington Ingalls, Lockheed Martin and Austral, and subcontractors like Raytheon Co. RTN. Moreover, the new five-year plan should grab the attention of investors interested in shipbuilding companies.

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GENL DYNAMICS (GD): Free Stock Analysis Report
 
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RAYTHEON CO (RTN): Free Stock Analysis Report
 
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