General Dynamics Corporation (GD) is scheduled to report its first quarter 2011 earnings results before market opens on April 27. The Zacks Consensus Estimate for the first quarter is earnings of $1.61 per share, up from $1.54 earned in the year-earlier quarter. For full year 2011, the Zacks Consensus Estimate stands at $7.13 per share, representing a 4.60% increase from the prior-year earnings of $6.82 per share. The full year 2012 earnings estimate is currently $7.67.
Previous Quarter Performance
General Dynamics’ fourth quarter EPS went up 20.9% to $1.91, comfortably surpassing the Zacks Consensus Estimate of $1.85. Revenues were up 8.9% year over year to $8.6 billion. This was however lower than the Zacks Consensus Estimate of $8.9 billion. General Dynamics ended the fourth quarter 2010 with a total backlog of $59.6 billion, down from $65.5 billion in the year ago quarter. Marine Systems had the highest backlog of $20.1 billion followed by $17.8 billion in the Aerospace segment.
Earnings Estimate Revisions
Ahead of the earnings release, we see a clear downward movement in estimate revisions for General Dynamics. Looking at the trends, it becomes clear that analysts are cautious on General Dynamics’ prospects in the near-term.
The apprehension reflects our concerns regarding the company’s fortunes, which are largely tied to the U.S. defense budget, where the threat of budget cuts looms large. Also, we have turned slightly cautious about the company’s steadily falling order backlog. The falling trend could continue in the near-term, due to delays in the award of new contracts for the next DDG-1000 and budget blues in Virginia-Class submarines.
Of the 21 analysts covering the General Dynamics stock, 1 and 4 have reduced their estimates in the last 7 and 30 days respectively; for the first quarter of 2011, versus only one upward revision each for both 7 and 30 days. For full year 2011, 2 analysts have revised downward their estimates in the last 30 days without any opposite revision. For full year 2012 however, one analyst each has upgraded and downgraded estimates in the past 30 days.
Magnitude of Estimate Revisions
Looking at the magnitude of estimate revisions, we find a steady downward trend. Over the last 7 and 30 days, the Zacks Consensus Estimate for the first quarter fell by a penny each; to $1.61 per share. The marginal downward trend by the analysts suggests that, while retaining the share would be beneficial for investors, they should wait for a more favorable entry point. For full years 2011 and 2012, however estimates over the past 30 days have remained steady at $7.13 and $7.67, respectively.
General Dynamics’ performance has been consistently positive over the trailing four quarters with respect to earnings surprises, with all the four quarters showing a positive surprise. The average earnings surprise was a positive 3.15%, implying that the company has beaten the Zacks Consensus Estimate by the same magnitude over the last four quarters.
General Dynamics was the fourth largest U.S. defense contractor in terms of revenue in fiscal 2010 after The Boeing Company (BA), Lockheed Martin Corporation (LMT) and Northrop Grumman Corporation (NOC). The company is one of the two contractors equipped to build nuclear-powered submarines in the U.S., the other being Huntington Ingalls Industries (HII).
General Dynamics revenue exposure is spread over a broad portfolio of products and services in business aviation; combat vehicles, weapons systems and munitions; shipbuilding design, repair and construction; and information systems, technologies and services. Diversification of revenue through exposure to a number of uncorrelated markets will keep the overall growth momentum steady.
General Dynamics has one of the strongest balance sheets among its peers with a low long-term debt-to-capitalization of 15.4% at the end of the fourth quarter 2010 (Zacks Industry Average was 88.4%). General Dynamics’ free cash flow from operations reached $2.6 billion in fiscal 2010.
Management returns a substantial portion of its free cash flow to shareholders through share repurchases and incremental dividends. The company repurchased 3.6 million shares during fiscal 2009 and 18.9 million shares during fiscal 2010.
Going forward, General Dynamics will focus on the revival of the business jet market (Gulfstream) through the introduction of its new G650 plane. The company is banking on the G650 as the future growth driver.
However the crash of a test G650 aircraft in the first week of April may have some bearings on the certification date and delay its entry in the market. Also a substantial portion of General Dynamics’ business is generated within the U.S. However budget deficits and political uncertainty make future defense budgets vulnerable to cutbacks.
Given these headwinds, we maintain our ‘Neutral’ stance on General Dynamics. General Dynamics also holds a Zacks #3 Rank, which translates into a short-term Hold rating, and correlates with our long-term recommendation.