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General Dynamics Could Get the Go-Ahead to Remake the Submarine Fleet

China's submarine fleet is bigger than America's.

That's according to U.S. Rep. Randy Forbes (R-Va.), chairman of the House Subcommittee on Seapower and Projection Forces. What's more, according to Forbes, at the rate China is building new subs -- and at the rate the U.S. Navy is retiring submarines -- China could have "twice the number of submarines we have in just over a decade."


Virginia
-class fast-attack nuclear submarine USS John Warner (SSN 785). Image source: U.S. Navy.

Bigger versus better

There are important caveats to that statement. As Politifact pointed out in a column in May, Forbes' estimate of the U.S. submarine fleet doesn't appear to include fleet ballistic missile submarines in its count, focusing instead on attack submarines. It also doesn't address qualitative differences between the U.S. submarine fleet (comprising modern, nuclear powered boats) and that of China (which includes some obsolete designs, and is heavily dependent on shorter-range diesel-electric subs).

That's a key differentiator, the wide gap in quality between the two sub fleets -- and it's one that the U.S. Navy wants to make even wider through...

Better subs for a smaller Navy

In a little-noticed announcement contained in the

last week, the Navy awarded General Dynamics (NYSE: GD) $116.2 million for work on Virginia-class fast attack submarines. Part of the award will go to installing "Virginia Payload Modules" in new Block V Virginia-class submarines. Essentially, this involves stretching the submarine's design to accommodate the addition of cruise missile tubes amidships -- increasing each submarines missile capacity from 12 to 40 missiles.

An even more interesting development, though, is that part of General Dynamics' award will pay for "South Dakota Insertion" (SDI) prototype materials to be installed in the new USS South Dakota (SSN 790), currently under construction by General Dynamics in cooperation with Huntington Ingalls (NYSE: HII).

"Acoustic superiority"

While the Pentagon doesn't say so outright, the SDI package that it's hiring General Dynamics to develop refers to a long-standing program dubbed "acoustic superiority." This program aims to give U.S. submarines an edge in the eternal game of hide and seek with hostile submarines and surface vessels on the high seas.

Details on SDI aren't exactly easy to come by, but the acoustic superiority the Navy seeks -- and that General Dynamics will try to provide -- appears to involve both offensive and defensive elements. Offensively, the SDI prototype will feature a large vertical sonar array -- bigger "ears" for hearing enemy boats -- and may incorporate such emerging technologies as laser or LED detectors. Defensively, General Dynamics will incorporate special sound-absorbing coatings on the hull, and improvements to dampen the noise of the subs' machinery within the boat.

What it means to investors

If all goes as planned, Rear Adm. Charles Richard, director of undersea warfare for the Navy, says the SDI will deliver "very dramatic" improvements in the Navy's "ability to compete in our acoustic spectrum." In the best case, such improvements could permit future iterations of U.S. Virginia-class nuclear submarines to operate undetected even in heavily patrolled waters off hostile coasts.

Such improvements could be huge force multipliers for an increasingly outnumbered U.S. submarine fleet. If they work as planned, they would certainly be incorporated into the new Ohio Replacement class of nuke boats currently under development at General Dynamics and Huntington Ingalls, and into future versions of the Virginia-class sub as well. There's also a real possibility that if the tech can be added into existing boats, the current fleet of submarines would also be retrofitted to upgrade their acoustic superiority.

How much additional revenue this would mean for General Dynamics is hard to say. Already, though, we know that the Navy has:

  • Invested $881 million in technology "insertion" programs for the Virginia-class boats since awarding an original contract back in October 2011.
  • Supplemented that with $42.5 million in additional funding in July of last year.
  • Now added a further $116.2 million in funding for the latest round of missile payload and acoustic superiority upgrades.

Tally that up, and General Dynamics has $1.04 billion in the bag from these contracts already -- a likely $94.5 million profit, or $0.31 per share, if we assume that these contracts will achieve the same 9.1% operating margin currently earned by the company's Marine Systems division. And there's more where that came from, because two things are certain:

These numbers are growing -- and these upgrades are ongoing.

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Fool contributor Rich Smith does not own shares of, nor is he short, any company named above. You can find him on Motley Fool CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 290 out of more than 75,000 rated members.

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