General Dynamics Corporation (GD) posted mixed results for the December quarter, surpassing the Zacks Consensus Estimate on the topline but only matching the consensus at the bottom. Looking forward, key drivers include the improving business jet market, its stable business of U.S. military vehicles, a backlog of over $57 billion, an ongoing share repurchase program and strong cash flow generation.
However, the company is largely tied to the U.S. defense budget, where the threat of budget cut is looming. Also, we have turned slightly cautious about the company’s steadily dropping order backlog, and risks related to the execution of key projects.
Headquartered in Falls Church, Virginia, General Dynamics engages in mission-critical information systems and technologies; land and expeditionary combat vehicles, armaments and munitions; shipbuilding and marine systems; and business aviation. The company operates through four segments: Information Systems & Technology (IS&T), Combat Systems, Marine Systems, and Aerospace.
General Dynamics was the third largest U.S. defense contractor in terms of revenue in fiscal 2011, after The Boeing Company (BA) and Lockheed Martin Corporation (LMT). The company is one of two contractors equipped to build nuclear-powered submarines in the U.S.
General Dynamics continues to benefit from strong congressional support for its programs in the 2012 defense budget. Going forward, the company’s focus will be on revival in the business jet market (Gulfstream) along with programs such as the Warfighter Information Network Tactical (WIN-T) program and Joint Tactical Radio System (JTRS) in the IS&T division.
Similarly, the Combat Systems and Marine Systems segments will receive a boost from higher volumes in the U.S. military vehicle business (Stryker combat vehicles and Abrams tanks) and ship programs DDG-51, Virginia class submarines and the Mobile Landing Platform program.
General Dynamics has one of the strongest balance sheets among its peers with a low long-term debt-to-capitalization of 18.8% at the end of fiscal 2011. General Dynamics’ free cash flow from operations reached $2.8 billion in fiscal 2011. Management returns a substantial portion of its free cash flow to shareholders through share repurchases and incremental dividends. The company repurchased 18.9 million shares during fiscal 2010 and 20 million shares during fiscal 2011.
General Dynamics’ total order backlog however decreased to $57.4 billion at the end of fiscal 2011 from $59.6 billion at fiscal-end 2010. Going forward, the U.S. economic fundamentals are basically being kept on a leash as the Euro-crisis continues to cast its spell over the financial markets, keeping risks of further cutbacks in future defense budgets at a high level.
The Zacks forecast for GDP growth for the first half of 2012 is now at just around 2.0%. This culminates into a GDP growth rate of 2.3% for fiscal 2012. Our apprehension is fueled by $15 trillion of national debt and an unemployment rate hovering around 8.3% which would lead to the Budget Control Act’s dictum of automatic cutbacks across the board going forward.
Going by the pulse of the economy and given the pros and cons, we prefer to maintain our long-term Neutral recommendation on the stock. Moreover, General Dynamics holds a Zacks #3 Rank that translates into a short-term Hold rating.
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