Neutral on General Dynamics

We recently reiterated our Neutral recommendation on General Dynamics Corporation (GD).

General Dynamics, headquartered in Falls Church, Virginia is a market leader in business aviation; land and expeditionary combat systems, armaments and munitions; shipbuilding and marine systems; and information systems and technologies.

General Dynamics was the fourth largest U.S. defense contractor in terms of revenue in fiscal 2009, after The Boeing Company (BA), Lockheed Martin Corporation (LMT) and Northrop Grumman Corporation (NOC).

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 the revenue base, through exposure to a number of uncorrelated markets will keep the overall growth momentum going.

Going forward, the focus areas of growth include a revival in the business jet market (Gulfstream) along with programs such as the Warfighter Information Network – Tactical (WIN-T) program and Common Hardware/Software III (CHS-3) in the IS&T division.

Similarly the Combat Systems and Marine Systems segment will receive a boost from higher volumes in the U.S. military vehicle business (Stryker combat vehicles and Abrams tanks) and surface combatants DDG-51 & DDG-1000 programs, respectively.

General Dynamics has one of the strongest balance sheets among its peers with a low long-term debt-to-capitalization of 19.1% at the end of the third quarter 2010 (Zacks Industry Average was 97.2%). General Dynamics’ free cash flow from operations reached $1.3 billion in the first nine months of 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 11.2 million shares in the first nine months of 2010. Also in March 2010, the company raised its regular quarterly dividend by 10.5% to $0.42 per share.

A large percentage of General Dynamics’ business is generated from within U.S. budgets and an uncertain political stance makes future defense budgets vulnerable to cutbacks. General Dynamics’ total order backlog decreased 5.6% to $61.8 billion at the end of the third quarter 2010 from $65.5 billion at fiscal-end 2009.

The National Commission on Fiscal Responsibility and Reform recently recommended $100 billion in cuts for the defense budget by fiscal 2015. This will hamper future order booking for all companies in the defense space.

In the near-term this limits the upside on General Dynamics, a Zacks #3 Rank (short-term Hold rating) stock.

GENL DYNAMICS (GD): Free Stock Analysis Report

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