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.
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