General Dynamics currently trades at ~ $61 and was added to my idea pipeline as it is a legacy stock which I currently own.
Please refer to the Quick review explained post if you have questions on what I look for in this analysis.
1- Business Performance (+) and intrinsic returns (+)
GD is a strong business with recent performance very much in line with historical averages. The company generates a reasonable amount of cash vs. its sales and has high ROE/ROAâs. The only âconcernâ would be a slowing down of growth.
In terms of returns, with a yield of 2.5% on a 25% payout ratio, the company could finance a 7-8% growth by using 40% of its earnings (@20% ROE) and use the remainder, 35% to buy back 3.5% of its shares based on the current earnings yield of 10.2%. This would give us an intrinsic return of up to 13% depending on GDâs ability to grow.
2- Balance Sheet Risk (+)
Very limited debt and reasonable current ratio given pre-ordered nature of the business. The Balance Sheet risk appears limited.
3- Valuation Risk (+)
GDâs valuation appears low both on a cash return, with the company being valued including debt at less than 10x FCF, and on a P/E basis.
Conclusion
GD appears to be a robust and stable business with little balance sheet risk and a relatively low valuation which may provide a good margin of safety to a new or existing investor. I will perform a Company analysis of GD.
Many happy returns,
Ben
http://marginofsafetyinvesting.com
Please refer to the Quick review explained post if you have questions on what I look for in this analysis.
1- Business Performance (+) and intrinsic returns (+)
| Metric | Status |
| FCF / Sales | Last twelve month (LTM): 7.7%, in line with GDâs historical performance between 6% and 9% |
| ROE | LTM: 20%, consistent with the companyâs historical performance and average of 20.6 over the last 5 years |
| ROA | LTM: 8.1%, again in line with GDâs 5 and 10-year averages |
| Revenue Growth | The company has been slowing down a bit, with growth of ~7% to 9% in recent years vs. historical year over year growth rates of 13%+ |
| Cash distribution to shareholders | GDâs dividend yield of 2.6% is in line with that of the S&P500, on a payout of about 25%. GD is an âirregularâ buyer of shares, buying 5% of its shares back over the last 5 years with some years of net increases and large buybacks in 2008 (a smart move!). |
In terms of returns, with a yield of 2.5% on a 25% payout ratio, the company could finance a 7-8% growth by using 40% of its earnings (@20% ROE) and use the remainder, 35% to buy back 3.5% of its shares based on the current earnings yield of 10.2%. This would give us an intrinsic return of up to 13% depending on GDâs ability to grow.
2- Balance Sheet Risk (+)
| Metric | Status |
| LT Debt / Equity | Currently at 0.25x and has been decreasing regularly from 0.6x in 2003 |
| Current Ratio | 1.3x in line with historical ranges between 1.1x and 1.3x |
3- Valuation Risk (+)
| Metric | Status |
| Cash Return | 9.6% |
| P/E | 9.8x, below the S&P and the companyâs 5 year average of 14x+ |
Conclusion
GD appears to be a robust and stable business with little balance sheet risk and a relatively low valuation which may provide a good margin of safety to a new or existing investor. I will perform a Company analysis of GD.
Many happy returns,
Ben
http://marginofsafetyinvesting.com
