Investing.com -- General Dynamics received a rating upgrade from Jefferies, which raised its recommendation to Buy from Hold and increased its price target to $400 from $380, arguing that accelerating demand for U.S. Navy submarines and improving shipyard productivity position the defense contractor for stronger earnings growth in the years ahead.

Jefferies said General Dynamics' Marine Systems business, which accounts for roughly a third of company revenue, continues to outperform expectations, with first-quarter sales rising 21% year-over-year versus the company's full-year guidance for 3% to 6% growth. The brokerage sees upside from a growing submarine backlog, improving labor productivity and margin expansion as production ramps on Virginia-class and Columbia-class submarine programs.

The bullish view is underpinned by the U.S. Navy's latest shipbuilding plan, which includes $125 billion of submarine procurement funding between fiscal 2027 and 2031, alongside billions of dollars earmarked for shipyard modernization, workforce development and productivity improvements. Jefferies said these investments support a path toward producing one Columbia-class and two Virginia-class submarines annually.

General Dynamics has already invested more than $4 billion in its Electric Boat shipyard over the past decade and plans to spend another $4 billion over the next five years while expanding its workforce. The company expects to hire more than 8,000 employees in 2026 to support rising submarine production.

Jefferies forecasts Marine Systems revenue will grow at a 6% compound annual rate through 2028, driven primarily by nuclear submarines, while operating margins improve from 7.0% in 2025 to 7.5% in 2026 and 7.8% by 2028 as productivity gains take hold.

The brokerage also cited continued strength in Gulfstream business jet deliveries and the potential for shareholder returns, estimating the company could generate about $3 billion of discretionary free cash flow after dividends in 2027. Shares closed at $341.07 prior to the report, implying roughly 17% upside to Jefferies' new target price.