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Is There Room Left to Run for General Dynamics?

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- By Nicholas Kitonyi

Shares of aerospace and defense company General Dynamcis Inc. (NYSE:GD) rose 2.25% on Wednesday. The Reston, Virginia-based company announced its fourth-quarter and full-year 2020 revenue and earnings before the opening bell.

Is There Room Left to Run for General Dynamics?
Is There Room Left to Run for General Dynamics?

The company's stock has gained nearly 17% since the end of October and by more than 44% since bottoming in March. However, General Dynamics is still down more than 18% from its highs reached last February.

Highlights from the recent quarter

General Dynamic reported a slight decline in earnings per share to $3.49, down from $3.51 reported a year ago. This was lower than analysts' expectations of $3.55.

The company's top line fell by 2.7% to $10.48 billion, which was also lower than the consensus estimate.

Annual revenue fell 3.6% to $37.92 billion. Diluted full-year earnings per share fell 8.2% to $11.

General Dynamic's estimated contract value soared 6.7% to $134.7 billion, which puts it in a strong position to continue generating sustainable revenue.

Chairman and CEO Phebe N. Novakovic contributed the defense and aerospace sectors for the strong quarterly performance amid the pandemic.

"Our defense segments continued to capture significant awards, leading to a record-high backlog, while our aerospace segment not only remained very profitable but actually improved its margins throughout the year, even as the broader business aviation industry contracted severely due to the pandemic," Novakovic said.


From a valuation perspective, shares of General Dynamics are trading at a trailing price-earnings ratio of 13.91, which indicates a significant undervaluation based on the Peter Lynch earnings line.

When we factor in expected earnings growth, the company's forward price-earnings ratio of 13.25 indicates an expectation of a slight earnings growth in the next 12 months. On the other hand, the PEG ratio of 6.42 indicates a potential overvaluation when we factor in expected earnings for the next five years.

Some of the company's close peers appear to be trading at relatively higher short-term valuation multiples with Mercury Systems Inc. (NASDAQ:MRCY) trading at a forward price-earnings ratio of 27.99. Another close peer, L3Harris Technologies Inc. (NYSE:LHX), is valued at a forward price-earnings ratio of 13.89.

However, their PEG ratios make them better long-term targets than General Dynamics. Mercury Systems' PEG ratio stands at 1.92, while L3Harris Technologies' equivalent is 2.32.

In summary, shares of General Dynamics appear to be relatively undervalued for short-term investing. However, they do not paint a compelling picture for growth investors looking for time frames of three to five years.

Disclosure: No positions in the stocks mentioned.

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This article first appeared on GuruFocus.