- By GF Value
The stock of General Dynamics (NYSE:GD, 30-year Financials) appears to be fairly valued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $182.685 per share and the market cap of $51.8 billion, General Dynamics stock is estimated to be fairly valued. GF Value for General Dynamics is shown in the chart below.
Because General Dynamics is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth, which averaged 9% over the past three years and is estimated to grow 2.42% annually over the next three to five years.
Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. General Dynamics has a cash-to-debt ratio of 0.20, which is worse than 75% of the companies in Aerospace & Defense industry. GuruFocus ranks the overall financial strength of General Dynamics at 5 out of 10, which indicates that the financial strength of General Dynamics is fair. This is the debt and cash of General Dynamics over the past years:
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. General Dynamics has been profitable 9 over the past 10 years. Over the past twelve months, the company had a revenue of $37.9 billion and earnings of $11 a share. Its operating margin is 10.90%, which ranks better than 71% of the companies in Aerospace & Defense industry. Overall, the profitability of General Dynamics is ranked 7 out of 10, which indicates fair profitability. This is the revenue and net income of General Dynamics over the past years:
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of General Dynamics is 9%, which ranks better than 72% of the companies in Aerospace & Defense industry. The 3-year average EBITDA growth is 5.2%, which ranks in the middle range of the companies in Aerospace & Defense industry.
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, General Dynamics's return on invested capital is 7.84, and its cost of capital is 7.18. The historical ROIC vs WACC comparison of General Dynamics is shown below:
Overall, The stock of General Dynamics (NYSE:GD, 30-year Financials) shows every sign of being fairly valued. The company's financial condition is fair and its profitability is fair. Its growth ranks in the middle range of the companies in Aerospace & Defense industry. To learn more about General Dynamics stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.