General Dynamics Corp. (GD, Financial) is an aerospace and defense company. It has four business groups: Aerospace, Combat Systems, Marine Systems and Information Systems and Technology. The company’s key customer is the U.S. government. The company also has business with non-U.S. governments and corporate and individual buyers of business aircraft.
In this article, let's take a look at this company and try to explain to investors the reasons this is an apparently appealing investment.
Gulfstream Aircraft
General Dynamics is the world's fourth largest defense contractor and the second largest maker of corporate jets by revenues. Demand for business jets is primarily driven by the health of corporate budgets. Corporate profits have improved since late 2009, so we think that orders for business jets will continue to improve. One large cabin business jet (G650) which is in high demand has orders booked for the next five years.
Moreover, we expect strong business jet sales at Gulfstream will contribute significantly to the company´s future earnings. General Dynamics expects an 11% year over year increase in the 2014 revenues driven by continued strong deliveries of Gulfstream aircraft.
The 17th Consecutive Annual Increase
Looking at the financials, the company has a strong balance sheet: good cash that allows the company to announce a 10.7% hike in its dividend payout of $0.62 per share, reflecting a dividend yield of 2.3%, higher than the industry average. Furthermore, last year the company repurchased 9.4 million shares, and this year the company repurchased 31.4 million shares (11.4 million in January 2014 and 20 million in February 2014) under an accelerated share repurchase agreement with a financial institution.
Analyst Recommendation
The firm is currently Zacks Rank # 2 – Buy, and it also has a longer-term recommendation of “Neutral.” For investors looking for a better Zacks Rank, Huntington Ingalls Industries Inc. (HII, Financial) could be the option.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 16.1x, trading at a discount compared to the industry mean. Earnings per share (EPS) have increased in a tremendous way in the most recent quarter compared to the same quarter a year ago, $1.76 per share for the fourth quarter. We include in the next graph the stock price because EPS often lead the stock price movement. As we can appreciate in the chart, the price performance makes the stock appealing with an upward trend. Last year, the stock´s share price has jumped by 62.14%, exceeding by far the S&P 500 performance. Also, it has demonstrated a pattern of positive earnings per share growth over the past two years.
Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. The ratio has increased from the same quarter one year prior. This is a clear sign of strength within the company.
Let´s compare the current ratio with the peer group in the next table:
| Ticker | Company Name | ROE (%) |
| GD | General Dynamics | 16.25 |
| HII | Huntington Ingalls Industries | 17.16 |
| ERJ | Embraer S.A. | 10.67 |
| NOC | Northrop Grumman Corp | 18.38 |
| WAIR | Wesco Aircraft Holdings Inc | 12.11 |
| BA | Boeing Co | 30.82 |
| LMT | Lockheed Martin Corporation | 60.61 |
The company has a current ratio of 16.25% which is higher than the one registered by Embraer S.A. (ERJ, Financial) and Wesco Aircraft Holdings Inc (WAIR, Financial), but lower than Huntington Ingalls Industries, Northrop Grumman Corp (NOC, Financial) and Boeing Co (BA, Financial). But for investors looking for a higher ROE, Lockheed Martin Corporation (LMT, Financial) could be the option.
Final Comment
As outlined in this article, we see the Gulfstream business as the primary growth engine for both earnings and revenue. Furthermore, General Dynamics has one of the strongest balance sheets among its peers. That’s why management returns a substantial portion of its free cash flow to shareholders through share repurchases and incremental dividends. Finally, Zacks Rank makes me feel bullish about this company.
I would recommend investors consider adding the stock for their long-term portfolios. Hedge fund gurus have also been active in the company in the fourth quarter of 2013. Gurus like James Barrow (Trades, Portfolio), Jim Simons (Trades, Portfolio), Prem Watsa (Trades, Portfolio) and David Dreman (Trades, Portfolio) have also invested in it.
Disclosure: Victor Selva holds no position in any stocks mentioned.
