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Risk, Reward Balance General Dynamics

Zacks Equity Research

We have maintained our Neutral recommendation on General Dynamics Corp. (GD) on Nov 25, 2013. The defense major currently retains a Zacks Rank #2 (Buy).

Why the Reiteration?

General Dynamics is one of the largest U.S. defense contractors whose revenue exposure is spread over a broad portfolio of products and services that help it to keep the overall growth momentum steady. The company is one of the two contractors equipped to build nuclear-powered submarines in the U.S.

The company’s top and bottom line succeeded in meeting the Zacks Consensus Estimate in the third quarter of 2013. The decline in operating expenses in the reported quarter demonstrates that the company is proactive in lowering costs and improving competitiveness.

Although the company will continue to incur expenses for adjusting its operations to market conditions, we believe the recent moves would help improve performance. These include consolidating the Weapons Systems business into the Munitions business and combining the U.K. business into the North American Mobile Communications operation.

Notably, jet sales at the Gulfstream business are continuing to see traction even in the slowing defense sales scenario. The $60 million top-of-the-line G650 large cabin business jet is in high demand, with orders booked for the next five years. Gulfstream is expected to contribute more significantly to General Dynamics’ earnings going forward.

In fact, strong Gulfstream margins driven by the G650, along with execution from Combat Systems and IS&T, drove most of the third quarter beat. The company expects an increase of approximately 17% in the group’s full-year revenues in 2013 compared with 2012 driven by continued strong deliveries of Gulfstream aircraft.

However, we remain on the sidelines owing to the threat of sequestration and defense budget cuts that continue to impact the backlog. General Dynamics ended the third quarter with a total backlog of $47,941 million, down year over year as well as quarter over quarter.

Other Stocks to Consider

Apart from General Dynamics, other defense stocks worth considering include The Boeing Co. (BA), Lockheed Martin Corp. (LMT) and Northrop Grumman Corp. (NOC), all with a comparable Zacks Rank #2 (Buy).

Read the Full Research Report on GD
Read the Full Research Report on NOC
Read the Full Research Report on BA
Read the Full Research Report on LMT

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