General Dynamics Poised To Fly Again

5/11/2009


  Recent Price
$54
  Dividend
$1.52
  Yield

2.8%

  P/E Ratio
9
  Shares (millions)
387
  Long-Term Debt as % of Capital
23%
  52-Week Price Range
$95.13 - $35.28

Two of General Dynamics’ ($54; GD) key businesses, corporate jets and military projects, have received unwanted attention in recent days. Jets have become symbols of corporate excess and military hardware a lightning rod for political debate. But bad publicity aside, the company’s growth opportunities appear far from grounded.

As the Pentagon’s fourth-largest contractor, General Dynamics is exposed to cuts in the defense budget. But on this front, the battle is going well. While the company’s $13.2 billion program for amphibious troop carriers will be reviewed, the Marine Corps commandant called the vehicle “an absolutely critical requirement for us.” General Dynamics will also build three next-generation Navy destroyers for about $2.5 billion each. General Dynamics, modestly valued at nine times expected 2009 earnings, is a Buy and a Long-Term Buy.

Business breakdown
General Dynamics operates four business segments. Information systems and technology (34% of sales in the past 12 months) produces satellites and surveillance electronics and designs computer systems. Combat systems (28%) provides armored vehicles, weapons, and ammunition. Marine systems (19%) is building eight U.S. Navy submarines over the next five years to fulfill a $14 billion contract. Lastly, the aerospace division (19%) makes the popular Gulfstream business jet and provides maintenance, repair, and charter services.

In the March quarter, per-share profits from continuing operations increased 8% to $1.54, topping the consensus by $0.08. Revenue rose 18% to $8.26 billion on strong growth in all four segments. The combat and marine systems businesses each grew at a 21% clip, though growth could slow in the year ahead. Aerospace sales rose 14%, lifted by an acquisition. Backlog of $71.13 billion was down slightly from December levels but up 43% from a year earlier.

Jets sputter but don’t stall
In better times, private jets commanded premiums to their sticker prices, and backlogs for some manufacturers stretched to five years. More recently, private jets have inspired public anger, while Congressional pressure on troubled firms seeking bailouts has led to some high-profile order cancelations. Exacerbating matters, the credit often required to buy these planes has become more difficult to secure.

Gulfstream sales fell nearly 9% in the March quarter, and General Dynamics cut its 2009 production target 22% after February’s “terrible bloodletting” of defaulted orders and delayed deliveries. Minimizing the damage in the quarter, General Dynamics covered contract defaults by finding new buyers or advancing clients in the backlog queue. Although conditions remain tough, the company says jet buyers are starting to return.

Conclusion
The consensus profit estimate for 2009 rose after General Dynamics said in April it expected to top earlier guidance. Wall Street expects profits to fall about 1% to $6.13 this year, followed by a 5% increase in 2010. The shares have rallied 52% from their 52-week low in March but still trade for just nine times trailing earnings, less than half of the five-year average valuation. An annual report for General Dynamics Corp. is available at 2941 Fairview Park Drive, Suite 100, Falls Church, VA 22042; (703) 876-3000; www.gd.com.

GENERAL DYNAMICS
Quarter

    Per-Share
     Earnings*

Sales
Change

      Quarterly
      Price Range

P/E Ratio
Range

Mar '09 $1.54 vs. $1.42 + 18% $61.46 -

$35.28

10 - 6
Dec '08 1.61 vs. 1.42 + 4% 73.62 - 47.81 12 - 8
Sep '08 1.59 vs. 1.34 + 4% 94.41 - 70.00 17 - 12
Jun '08 1.51 vs.

1.27

+ 11% 95.13 - 82.47 17 - 15
           
Year
(Dec.)

Sales
 (Bil.)

Per-Share
Earnings*
Per-Share
Dividend

52-Week Price Range

P/E Ratio
Range

2008 $29.30 $6.13 $1.34 $95.13
-
$47.81 16 - 8
2007 $27.24 $5.10 $1.10 94.55
-
70.61 19 - 14
2006 $24.06 $4.20 $0.89 77.98
-
56.67 19 - 13
2005 $21.24 $3.63 $0.78 61.13
-
48.79 17 - 13
             
————————————————— Quadrix Scores † —————————————————
Overall Momen-
tum
Value Quality Financial
Strength
Earnings
Estimates
Performance
94 72 92 89 74 78 31

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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