General Dynamics (NYSE:GD) has landed the largest shipbuilding contract in history, a $22 billion deal for nine new nuclear submarines.

The award, while not unexpected, is welcome news for General Dynamics shareholders who have been waiting since April for a deal to be announced. But the contract, despite its massive size, isn't all that General Dynamics shareholders had hoped for. And it points to some potential vulnerability at one of General Dynamics' most important businesses.

Here's a deep dive into the massive Navy contract, and what it means for General Dynamics investors.

Value in bulk buying

The award, issued to General Dynamics subsidiary Electric Boat, is for a fifth batch of fast-attack submarines, with deliveries scheduled from 2025 to 2029. The Navy already has 18 of these Virginia-class subs in the fleet, toward a goal of eventually procuring 40 boats.

A Virginia-class sub fires while submerged.

Illustration of a Virginia-class fast-attack sub in action. Image source: U.S. Navy.

Defense contractors have been pushing for more multi-boat orders because it allows them to better plan workflow and component sourcing, and avoid the costly retraining process that can come with having to rehire workers for intermittent single-boat orders. Kevin M. Graney, president of the Electric Boat division, called the award "a generational increase in submarine production for our nation" that will help his division operate more efficiently.

"This contract allows for our shipbuilding team, our suppliers and our employees to plan ahead so that we can continue to deliver submarines of unmatched quality, stealth and lethality," Graney said in a statement.

General Dynamics said it is also becoming more efficient as it has more time to work on the boats. The Virginia builders have driven delivery timelines down from an initial 88 months to a current average rate of 68 months, while doubling the build rate to two ships per year.

It could have been more...

The contract size could grow if the Navy exercises a $2 billion option for a 10th boat. But even if it does, the award is still short of the 11-boat proposal floated in this year's budget submission and the talk of 13 boats in this order just a few years ago. And General Dynamics is far from the lone beneficiary from the deal. Subcontractor Huntington Ingalls (NYSE:HII) will actually assemble six of the nine boats, with the Pentagon estimating that about one-quarter of the total work associated with the award will be performed at that company's Newport News, Virginia, shipyard.

James Geurts, assistant secretary of the Navy for research, development, and acquisition, told reporters that Huntington Ingalls is getting the extra work to allow General Dynamics to get initial production of the new Columbia-class ballistic missile submarine up and running. But the Electric Boat operation has also been the target of some grumblings inside the Pentagon over manufacturing performance, and General Dynamics overhauled management of the unit back in September.

A submarine in front of a setting sun.

A Virginia-class sub on open water. Image source: General Dynamics.

General Dynamics will be responsible for building the new "Virginia Payload Module" (VPM) the Navy ordered for eight of the nine new boats. The VPM is a revamped midsection that adds four large-diameter payload tubes and allows additional weapons and sensors to be brought on board. Although the exact cost of the VPM is unclear, it is added revenue that should help offset some of the lost revenue from Huntington Ingalls building most of the subs.

GD would also build the 10th boat on this Virginia-class order if the Navy exercises its option, but it appears that decision might be contingent not on the Pentagon coming up with additional funding, but rather based on how the Columbia is proceeding. That offers additional opportunities for the company, but also highlights the risk the Navy sees in a program that is a General Dynamics flagship and a top Pentagon priority.

Sailing toward smoother waters?

It's worth noting that shares of General Dynamics fell 2% on the first day of trading after the award was announced, and have been flat since, which at first glance seems odd for a company announcing a record-setting $22 billion-plus contract. Yes, the contract was expected, but finalizing the award and getting the details on paper are still important steps for the company that will provide workload stability at the shipyards well into the next decade.

General Dynamics has been the laggard among defense stocks for the past few years in part because of issues at certain businesses, but also because it is perceived to lack the blockbuster growth platform that rivals Lockheed Martin and Northrop Grumman enjoy with their F-35 fighter and B21 bomber, respectively.

LMT Chart

Defense stock data by YCharts

The submarine work, and the Columbia in particular, are among the most obvious big-ticket catalysts inside the General Dynamics portfolio. And while this award is a boon for Electric Boat, the details contained within also highlight the uncertainty surrounding the shipyard and the Navy's concerns about the Columbia's development.

I believe General Dynamics is making progress working through its issues and is likely to close that valuation gap with its peers in the coming years, making it one of defense's better buys. The sub deal, despite its size, is not the spark to get shares of General Dynamics rocketing higher. But it is a milestone in what hopefully will be a period of growing momentum for the company and its shares.