Shares of General Dynamics Corp. (GD, Financial) are higher by almost 17% since the last time I discussed the company. At that time, I felt that investors purchasing the name could see a low double-digit return.
While this gain has taken place much faster than anticipated, I still feel General Dynamics is an excellent name to own in the aerospace and defense sector. This is especially true in light of the company's most recent earnings report.
Quarterly highlights
General Dynamics reported first-quarter earnings results on April 28. Revenue of $9.4 billion was a 7.3% improvement from the prior year. This was the highest year-over-year percentage increase since the third quarter of 2019. Revenue was also almost $500 million more than Wall Street analysts had expected.
Earnings per share of $2.48 was a 5 cent, or 2.1%, increase from the same period a year ago. Net earnings improved 0.3% to $708 million. The difference between the two growth rates was due to a slightly lower share count in the most recent quarter. While the comparable growth may not be that impressive, it should be noted that this was the first bottom-line improvement since 2019.
All elements of the company contributed to the first-quarter improvement.
Revenue for Aerospace, which was extremely weak last year, totaled $1.9 billion, a nearly 12% increase. Much of this growth was due to a higher number of Gulfstream aircraft deliveries. Gulfstream had a difficult 2020 as demand for private aircraft took a nosedive during the pandemic. The book-to-bill ratio was 1.34, which was the strongest order quarter dating back two years. This shows demand for Gulfstream aircraft could be on the rebound as customers see more clarity than they did at this time last year. Total backlog was down 10% from the previous year, but higher by 3% sequentially. Operating margins contracted 250 basis points to 11.7%, but this was in line with company guidance.
Marine Systems revenue was 10.6% higher at $2.5 billion due to increased volumes on Virginia-class Block V and Columbia-class submarines. This segment has been performing quite well over the past several years and has now produced growth on a year-over-year basis for 14 consecutive quarters. This segment continues to rack up additional awards, including a $1.9 billion award for construction of the 10th Virginia Block V. The backlog, though down $231 million from the fourth quarter of 2020, is still almost $50 billion, 15% above the same levels a year ago. Since many of these projects are long-dated, it is likely that they will be funded to completion, providing for multiple years of work. Operating margins declined 10 basis points to 8.1%.
Combat Systems' sales improved 6.6% to $1.8 billion, with strength in both the U.S. and international businesses. Revenue was at its highest in more than 10 years. Leadership noted that all businesses were higher compared to the prior year, but that growth was particularly robust in combat vehicles sales to international customers. This segment has a backlog of more than $14 billion. Operating margins improved 30 basis points to 13.4% due to better volumes.
The Technologies segment also returned to growth as revenue was up 3.1% to $3.2 billion. Information technology was up 5% as the increase in new programs was a tailwind to results. General Dynamics has been very aggressive in courting awards for this segment, with the company having written $30 billion worth of proposals. Much of this is geared toward new business, which could be a major source of future growth. Technologies had a book-to-bill ratio of 1.1 for the quarter and the operating margin of 9.6% matched that of the prior year.
General Dynamics ended the first quarter with a backlog of $89.6 billion, essentially flat on a sequential basis but a 4.5% improvement from last year. This would provide the company with more than two years' worth of work using annual revenue totals. Nearly 71% of the backlog is funded with the total potential value reaching $131 billion.
The company's balance sheet remains in good shape. General Dynamics ended the quarter with total assets of just under $50 billion, current assets of $20.4 billion and cash and equivalents of $1.8 billion. Total liabilities stood at almost $50 billion, with current liabilities of $15.2 billion. Total debt is $13.2 billion, with $3.2 billion due within the next year. Much of the current debt will mature in the current quarter.
Valuation analysis and final thoughts
General Dynamics' most recent quarter showed positives in all business segments, a trend that is expected to continue for the duration of the year.
This is reflected in expectations for the company. According to analysts polled by Yahoo Finance, General Dynamics is expected to earn $11.16 in 2021, up marginally from last year. With shares trading at $190 at the moment, the stock has a forward price-earnings ratio of 17, a small premium to the five-year average multiple of 16.3 times earnings.
Analysts expect that business will really pick up next year as earnings per share are expected to grow by almost 10% to $12.23. Using 2022 numbers, General Dynamics trades with a price-earnings ratio of 15.5, a decent discount to the recent average valuation.
GuruFocus believes that the stock is slightly ahead of its intrinsic value.
With a GF Value of $185.58, General Dynamics has a price-to-GF Value of 1.02, placing the stock in fairly valued territory.
Even the rally that has occurred since February hasn't caused shares of General Dynamics to become overly expensive compared to either the historical valuation or the intrinsic value.
The easy money may have been made already, but long-term investors should still consider owning General Dynamics. Its business has already improved following a difficult year and the company has an envious backlog. This is in addition to the company's dividend growth streak of 28 years and market-beating yield of 2.3%. With these positives going for the company, I continue to rate General Dynamics as a buy.
Disclosure: The author has a long position in General Dynamics.
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