General Dynamics (NYSE:GD) is moving into the civilian shipbuilding business in a big way.
Although primarily known as a builder of destroyers, submarines, and even armored land vehicles for the military, General Dynamics has increasingly sought (and won) civilian shipbuilding contracts as a means of diversifying its business away from a stagnating U.S. defense budget. Over the past decade, it's built about a dozen such commercial vessels.
For example, earlier this year we told you about the two liquefied natural gas-powered containerships that General Dynamics built for privately held TOTE Maritime. It's also built ECO Class civilian oil tankers for energy giant Kinder Morgan and Seacor Holdings.
Last week, we learned that the company is continuing in this line, booking orders for two new 870-foot-long "Kanaloa-class" LNG-powered containerships capable of carrying 3,500 20-foot cargo containers each. General Dynamics NASSCO president Fred Harris calls the vessels, which will be built for Matson, Inc. (NYSE:MATX) subsidiary Matson Navigation Company, the "next generation of shipping vessels."
Their large capacity and improved fuel efficiency, says Matson, will permit it to replace three old diesel-powered vessels with just two new ones. Combined with two similar-size smaller Aloha-class vessels being built for the company by the Aker Philadelphia Shipyard, Matson says it will be able to remove seven older vessels from service, replace them with just four new ones, and thus reach its "optimal" fleet size of just nine ships.
That's great news for Matson. But what does it mean for General Dynamics?
What it means for General Dynamics
First and foremost, the new order from Matson means $511 million in new revenue for General Dynamics. Per unit, that appears to be more revenue than the company got building tankers for Kinder Morgan and Seacor, which probably sold for less than $150 million apiece.
More broadly, though, it shows us that General Dynamics' civilian shipbuilding business has momentum. Just a few months ago, General D shared that it has orders booked for seven commercial vessels over the next two years. That number has now increased by 28.5%. In total, the company has now stacked up almost as many civilian ships in backlog over the next two years as it built for civilian buyers in all of the previous 10 years.
While civilian shipbuilding still represents only a small portion of the $31.2 billion in sales General Dynamics books in a year, it's making up an increasingly large proportion of the revenue flowing into the company's $8 billion Marine Systems business. While the company doesn't break out these numbers, if you figure that civilian vessels are averaging about $200 million apiece, then nine vessels, built over two years, works out to roughly $1.8 billion in revenues -- or more than 10% of Marine Systems revenue.
While not wholly diversified yet, that's clearly the direction in which General Dynamics is sailing.
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. 295 out of more than 75,000 rated members.
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