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Boatloads of Profit for General Dynamics and Northrop

By Rich Smith - Updated Apr 5, 2017 at 7:55PM

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Shareholders benefit when their companies do it right.

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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Stocks Mentioned

General Dynamics Corporation Stock Quote
General Dynamics Corporation
GD
$242.69 (0.50%) $1.22
Northrop Grumman Corporation Stock Quote
Northrop Grumman Corporation
NOC
$492.65 (1.47%) $7.15
The Boeing Company Stock Quote
The Boeing Company
BA
$167.07 (-2.91%) $-5.01
Lockheed Martin Corporation Stock Quote
Lockheed Martin Corporation
LMT
$441.36 (0.27%) $1.20
Textron Inc. Stock Quote
Textron Inc.
TXT
$67.76 (-1.07%) $0.73
Unisys Corporation Stock Quote
Unisys Corporation
UIS
$10.40 (-3.39%) $0.36

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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