Should General Dynamics be in Your Portfolio?

Aerospace and defense company General Dynamics Corporation (GD) delivers information technology solutions, nuclear-powered submarines, and tactical vehicles, among other mission-support services. Because its orders remained strong across all segments, the company reported strong first quarter results.

Robust combat vehicle sales to international customers and a substantial improvement in its technologies segment because of investment in new information technology programs has strengthened the company’s balance sheet. The stock has gained 50.9% over the past year and 28.1% so far this year.

Increased defense spending by governments worldwide  and growing investments in the development of advanced technologies to support military needs  should accelerate GD’s growth.

So, here is what we think could shape GD’s performance in the near term:

Increased Aerospace and Defense Spending Should Boost Growth

A building competition among the geopolitical leaders that is being spearheaded by R&D led technological advancement has driven  a major increase  in the defense spending by  most nations. In fact, the global aerospace and defense market size is projected to hit  $49.68 billion by 2026, growing at a 2.5% CAGR. Furthermore,  as the commercial aerospace sector slowly recovers from its  COVID-19-pandemic-induced stagnation , there should be a significant spike in investment in aerospace manufacturing. As such, we think GD is in an excellent position to capitalize on this tailwind and generate substantial returns this year and beyond.

Recent Contract with the U.S. Government Should Strengthen Position

In March, GD’s wholly owned subsidiary Gulfstream Aerospace Corp. was awarded $696 million in contracts by  the U.S. Air Force Life Cycle Management Center. The company will  provide engineering services support and contractor logistics for C-20 and C-37 aircraft for the U.S. Air Force, Army and Navy. This close partnership with the U.S. government should allow GD to offer its broad portfolio of products and services in business aviation and solidify its position in the defense industry. 

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Strong Financials and Profit Margin

GD’s revenue increased 7.3% year-over-year to $9.39 billion in the first quarter, ended April 4, 2021. Its operating earnings under its Combat Systems’ segment grew 9.4% from its  year-ago value to $244 million, while its operating earnings under Marine Systems increased 8.7% year-over-year to $200 million. The company’s operating margin under Combat Systems was 13.4% for this period, compared to 13.1% in the first quarter of 2020.

GD’s  8.2% trailing-12-month net income margin and 11% EBIT margin are 83% and 43% higher than the 4.5% and 7.7% industry averages, respectively. Also, its ROE and ROA of 22.2% and 6.3%, respectively, are substantially higher than  industry averages.

POWR Ratings Reflect Solid Prospects

GD has an overall B rating, which translates to Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. GD has a B Value Grade. Its 17.04x forward P/E , which is 23.6% lower than the 22.30x industry average, is in sync with this grade.

Also, in terms of Stability Grade, GD has a B. This reflects that it is more stable than its  peers.

Click here to see the additional POWR Ratings for GD (Quality, Momentum, Growth and Sentiment).

The stock is ranked #15 of 67 stocks in the C-rated Air/Defense Services industry.

If you’re looking for other top-rated stocks in the same industry, with an Overall POWR Rating of A or B, you can access them here.

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Bottom Line

Better-than-anticipated revenue growth across all segments coupled with strategic contracts with the U.S. government should help GD grow in tandem with the industry. As  global defense and aerospace spending is likely to increase, we expect GD to continue  driving  steady growth in its financials and profitability.

GD shares were trading at $190.99 per share on Thursday morning, up $0.31 (+0.16%). Year-to-date, GD has gained 30.11%, versus a 11.32% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More…

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