UPSETTING LOSS

The Navy’s selection last week of Bath Iron Works’ arch rival as the lead designer for the next generation of stealth warships was a tough and surprising loss for the home team. Although BIW still will get a hefty share of the DD(X) program, workers and executives were glum about coming in second. Maine’s congressional delegation was united in disappointment and in offering assurances that the Navy would have to justify its choice.

It wasn’t just local fans who were taken aback. No less an impartial and seasoned observer than The Wall Street Journal called the selection of the Ingalls Shipbuilding division of Northrup Grumman for the $2.9 billion three-year contract a “major upset.” According to the WSJ, “the decision shocked many industry officials,” who had figured the deal a lock for General Dynamics, BIW’s parent company.

General Dynamics, the experts said, “would handily win” for several reasons: It has been praised for its well-run shipbuilding programs; its partner in this bid, Lockheed, already makes the electronics for the current Navy destroyers; Northrup Grumman is behind schedule and over budget on its current Navy project, an amphibious transport; and its electronics partner, Raytheon, is being criticized for several of its current programs. This shocker came immediately after two other recent setbacks for General Dynamics: It got beat by Northrup Grumman for the purchase of Newport News Shipbuilding and it lost the lead role in building the Army’s Future Combat System to Boeing; both were deals it was expected to win.

So how did investors react to this losing streak? Pretty much the way anyone who follows this unpredictable market might expect – General Dynamics’ stock closed Friday at an all-time high of $99.80.

Defense procurement is a complicated, even confusing business, but this is not a case of Wall Street getting hit on the head with a $600 hammer. Investor behavior here is not irrational; it just has little or nothing to do with losing the DD(X) contract. The run-up in General Dynamics’ stock began roughly a year ago – from $68 a share – and is directly tied to the company’s very strong move in the information technology sector, from the purchase of Motorola’s IT unit last year to the announcement Friday that it was buying an outfit called Advanced Technical Products at a price that immediately would add to earnings. Meanwhile, starting with the Newport News acquisition, Northrup Grumman has made a very strong move in shipbuilding.

The DD(X) contract is hardly a crushing blow to BIW. It will share 38 percent of the design contract with Ingalls and will split the actual production of the ships, which could amount to $60 billion if the full run of 50 are built. Certainly, Ingalls’ control over design means the DD(X) will be better suited to its shipbuilding facilities, giving it the edge in turning a profit.

Maine’s congressional delegation is right to insist that the Navy explain its decision and the Navy says it will do so in the coming weeks and months. Part of the explanation already has been made clear: Several elements of the Northrup Grumman design were cited as superior. Part can be inferred: The DD(X) program would not exist at all had its predecessor, the DD-21, not been scrapped after going alarmingly over budget under General Dynamics’ design team; General Dynamics for the past year has been focused on information systems, Northrup Grumman on shipbuilding. Maybe the home team just got cocky.