Balanced View on General Dynamics

Zacks

On May 15, we have issued an updated research report on General Dynamics Corp. (GD). The defense operator looks well-positioned for 2014 given its sizeable backlog orders thanks to its diversified business nature. At the end of first quarter 2014, General Dynamics had backlog orders worth $56 billion, up 10% from the year-ago period.

On the flip side, scale back in defense expenditure by the government will continue to deter the company’s growth prospects. General Dynamics’ Information Systems & Technology (IS&T) and Combat Systems will likely face the brunt of the budget sequestration in 2014.

General Dynamics, a Zacks Rank #3 (Hold) stock, posted encouraging results in first-quarter 2014. Quarterly earnings as well as revenue outpaced the Zacks Consensus Estimates. On a year-over-year basis, top line edged down 1.1% from the year-ago period due to lower returns from Combat, Marine Systems and IS&T operating segments. Earnings, however, outperformed on the back of strong contributions from the Aerospace segment as well as falling operating cost.

Going ahead, the company’s prime offering, the Virginia-Class submarines, could prove to be the key contract provider in the future. Recently, General Dynamics secured an $18 billion long-term navy contract to supply 10 additional Virginia-Class submarines. In addition, the estimated 5.8% increase in worldwide passenger traffic in 2014 as per the Internal Air Transport Association could bring in lucrative aerospace orders.  

On a positive note, General Dynamics’ successful cost-saving initiatives are commendable and will further lead to margin expansion. The first quarter saw a 50 basis point improvement in margins to 11.9% as operating costs declined by $104 million year over year.

However, the emergence of China as a premier defense operator could be a probable threat for the U.S. contractors. The U.S.’s dominance in military technology is being increasingly challenged by China’s rapid modernization programs due to the cutbacks in America’s defense spending.

Key Picks from the Sector

Other better-ranked defense players include The Boeing Company (BA), Embraer SA (ERJ) and Alliant Techsystems Inc. (ATK). All the above stocks currently carry a Zacks Rank #2 (Buy).

Read the Full Research Report on ERJ
Read the Full Research Report on BA
Read the Full Research Report on GD
Read the Full Research Report on ATK


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