General Dynamics poised for flight


  Recent Price
  P/E Ratio
  Shares (millions)
  Long-Term Debt as % of Capital
  52-Week Price Range
$95.13 - $74.01

General Dynamics ($80; NYSE: GD) is best known for making weapons of war. But the company’s diverse mix of businesses should deliver profit growth even in peacetime. In the six months ended June, profits from combat systems jumped 48%, while the business-jet unit managed 28% growth. Orders are on the rise, lifted by strong demand for private jets, tanks, and tactical-communication systems. Funded backlog rose to $5.2 billion at the end of June, up 13% from year-earlier levels.

The stock remains attractively valued, given its strong growth prospects. At 13 times estimated year-ahead earnings of $6.32 per share, General Dynamics trades below its five-year average forward P/E ratio of 14. Consensus estimates for 2008 and 2009 have been trending higher over the last three months and project per-share-profit growth of 20% this year and 10% next year. General Dynamics is a Buy and a Long-Term Buy.

Big and diverse
As measured by sales, General Dynamics is the world’s sixth-largest defense contractor and second-largest maker of private jets. General Dynamics operates four business segments. Information systems and technology (35% of 2007 sales, 32% of operating profit) makes electronics for weapons systems and specialized equipment for civilian government agencies and commercial customers. Combat systems (29%, 29%) makes armored vehicles and munitions. Aerospace (18%, 26%) makes private jets for corporations and wealthy individuals under the Gulfstream brand. Marine systems (18%, 13%) makes ships for the military.

Jet propulsion
The aerospace segment has grown swiftly in recent quarters, lifted by robust demand for its business jets. General Dynamics introduced its latest Gulfstream jet, the G650, in March 2008, with plans to begin delivery in 2012. The fast, long-range jet has a base price of nearly $60 million. A rise in used-jet inventories in August could presage a slowdown in demand for the new, high-end plane. But General Dynamics says initial orders have far exceeded expectations and has not mentioned any erosion of demand. More than half of G650 orders have come from foreign customers.

In August, General Dynamics announced it would acquire Jet Aviation, a Swiss air-services company, for about $2.25 billion in cash. Jet Aviation operates a global network of maintenance and service centers that repair and customize planes. The acquisition, expected to close by the end of this year, creates a new and more stable revenue stream while increasing General Dynamics’ exposure to the rise in foreign demand for private planes.

Military action
Military operations in the Middle East are bolstering results at the combat-systems division, as the Army replaces tanks damaged or destroyed. While the need for some ordnance will decline after the U.S. pulls out of Iraq, demand for some military equipment should remain strong even during peacetime. The marine-systems segment stands to benefit from the U.S. Navy’s plans to significantly upgrade and expand its fleet over the next several years. An annual report for General Dynamics Corp. is available at 2941 Fairview Park Drive, Suite 100, Falls Church, VA 22042; (703) 876-3000;

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