Boatloads of Profit for General Dynamics and Northrop

In these uncertain times, there's a lot to be said for knowing the future. So let's have a big round of applause from all General Dynamics (NYSE: GD  ) and Northrop Grumman (NYSE: NOC  ) shareholders for the U.S. Navy. On Monday, the good ol' USN delivered a veritable boatload of certainty to both companies -- and I mean that literally.

An unterseeboot-load of revenue
A press release issued by lucky recipient General D (or should that be Admiral D?) tells the tale of $14 billion in government contracts awarded to both it and partner Northrop. The two defense contractors will be building eight Virginia-class nuclear attack submarines over the next five years -- at a cost about $4 billion less than previously feared.

Shareholders will certainly welcome the news. To have it all awarded in one fell swoop has to feel nice, and it also lends assurance about what to expect in future years, revenuewise. But this is actually news that we all, as taxpayers, can applaud. Here's why:

According to the Navy, it worked with General D and Northrop to cut $400 million from the cost of building each sub, and to reduce the build time per sub by a full two years -- from 84 months to 60 months. That's a welcome respite from the news we more commonly get in defense circles. Here, stories concerning Lockheed Martin's (NYSE: LMT  ) Joint Strike Fighter, Boeing's (NYSE: BA  ) Future Combat Systems, and any number of other contractors' projects abound with complaints over production delays, cost overruns, and snafus so big that they make even Washington bureaucrats throw up their hands in disgust.

With these $14 billion in federal dollars in the bag, General Dynamics and Northrop may also feel less tempted to lay off workers, as fellow government contractors Textron (NYSE: TXT  ) and Unisys (NYSE: UIS  ) recently did.

Everybody dance, now
With Christmas almost here, I've saved the best news for last: The two bits of good news above are actually self-reinforcing. The more defense contractors control costs, the less taxpayer outrage they'll face over failures to control costs. And the more likely it will become that when future work gets parceled out, responsible contractors like General Dynamics and Northrop will emerge victorious. That's good news for shareholders and taxpayers alike.

Who's on Santa's naughty list for failure to emulate these contractors' success? Find out in:

Fool contributor Rich Smith owns shares of Boeing. The Motley Fool's disclosure policy gets more things done by 9 a.m. than most conflict of interest policies do all day long.  


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  • Report this Comment On December 28, 2008, at 11:21 AM, whereaminow wrote:

    Well, since I am a shareholder of NG and an employee, this is good news for me.

    In fact, if you were smart enough to be buying defense contractors, rather than selling them on the foolish advice that an Obama administration would fundamentally alter foreign policy, kudos to you!

    But before we all start sucking each other's lollipops, let us remember that there is no such thing as good government, and in the long run future generations of Americans will suffer if we continue to take orders from the Military Industrial Complex.

    Though, the future offspring of all NG shareholders will probably suffer a lot less :)

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