GD - General Dynamics: A Defensive Name With Strong Demand

2023-04-24 07:45:00 ET

Summary

• Defense contractors like General Dynamics Corporation have seen huge demand for their products, creating sizable backlogs.
• General Dynamics is a great stock to own in times when allies around the world are looking to bolster their militaries.
• The company has strong free cash flow, which supports General Dynamics Corporation's growing dividend.

General Dynamics Corporation ( GD ) has a wide offering of products from business jets to combat vehicles like tanks to nuclear-powered submarines and communications systems.

In today's world, nations across the globe are looking to bolster their military due to the unfortunate results that have taken place in Ukraine. More equipment plus new technology, which is something the likes of General Dynamics offers.

Who Is General Dynamics

General Dynamics is one of the largest defense contractors in the world, playing an important role for the United States military and its allies.

In 2022, General Dynamics generated total company revenue of $39.4 billion, which was an increase of 2.4% over the big year the company had in 2021. In addition, GD saw their net earnings increase 4.1% to $3.4 billion and its EPS increase to $12.19, which was a year-over-year increase of 5.5%.

As of the end of 2022, General Dynamics had a total backlog valued up to $91.1 billion, a 4% increase from prior year and a new record for the company. The total estimated contract value, which takes into account managements estimated additional value in unfunded indefinite delivery, totaled $127.7 billion.

Here is a breakdown of the company's revenue by segment:

• Aerospace: $8.6 billion (5.3% increase y/y)
• Marine Systems: $11.0 billion (4.9% increase y/y)
• Combat Systems: $7.3 billion (flat y/y)
• Technologies: $12.5 billion (flat y/y).

2023 Guidance

During the company's Q4 earnings release , management provided their 2023 expectations for the year. Those expectations included:

• ~20% revenue increase for the Aerospace segment
• 145 Aerospace deliveries compared to 120 in '22
• Flat revenue growth for Marine, Combat, and Technologies
• ~5% revenue growth overall.

Sound Financial Position

General Dynamics has prided itself on maintaining a strong balance sheet over the years, which has led to their A- credit rating. Strong free cash flow from the business has allowed them to limit their debt position, allowing even more flexibility for the company.

On the year, General Dynamics generated a record-high $4.6 billion in cash flow from operations, in which they used that to reduce their debt by $1 billion and re-invest another $1.1 billion back into the company by way of capital expenditures. This gives GD free cash flow of $3.5 billion, after reducing CapEx.

In addition, GD has been a shareholder-friendly company looking to not only increase the dividend on an annual basis, but to also return money back to shareholders via buybacks. During the year, GD paid $1.4 in dividends and bought back stock totaling $1.2 billion, ending the year with $1.2 billion remaining in cash.

Defense Is A Sector That Continues To See Record Demand

Have exposure to either individual stocks within the defense sector or more broad exposure through a defense ETF, seems like a great area to be for the foreseeable future. The demand is only expected to climb given the unrest over in Europe and potential conflicts arising in China.

Defense spending is not something that is only increasing here in the United States, it is increasing all over the world. Just a few weeks ago, it was reported that the French government approved their biggest military spending spree in over 50 years. They are expected to spend upwards of $450 billion in military spending by 2030.

Last month, the U.S. had hearings regarding the Pentagon's record $842 billion budget request, just for the current fiscal year. Pentagon officials cited their growing concern with China, who the U.S. could have conflict with in the coming years regarding Taiwan. The U.S. Navy is a huge part of the budget increase, which directly impacts a company like General Dynamics.

We may very well see the first $1 Trillion defense budget sooner than we think here in the U.S.

Is GD Stock A Buy, Sell, or Hold?

In terms of performance, General Dynamics is a stock that has outperformed the S&P 500 (SP500) by roughly 20% over the past three years, gaining 66% compared to the S&P 500's 46% gain in that time frame.

Over the past 12 months, GD stock is down nearly 10%.

Analysts are looking for adjusted EPS of $12.80 in 2023, which would equate to 5% from 2022. Using this, shares of GD are currently trading at a 2023 earnings multiple of 17.7x.

Over the past five years, shares of GD stock have traded at an average earnings multiple of 15.5x and over the past decade closer to 16.7x. Regardless, shares do look a little overvalued when looking at this metric.

Demand is going to continue to climb, so I expect EPS growth to continue to climb higher, which is one reason analysts have 2024 EPS estimates climbing double digits, which makes the valuation a little more enticing. However, that is a ways out, as such, I would prefer a better entry point when it comes to GD, as a lot of the demand appears priced into the stock right now. As such, I rate GD stock a HOLD in my opinion.

The average 12-mo price target for shares of GD is $263, implying 17% upside from current prices.

Investor Takeaway

General Dynamics Corporation is a very well run company and a very important company when it comes to national defense. Given the unfortunate events happening in Ukraine, defense budgets are seen rising across the world, which benefits a defense contractor like general Dynamics.

General Dynamics Corporation has a huge backlog and strong cash flows to go along with it. Those strong cash flows support the company's growing dividend. GD currently yields a dividend of 2.32% with a low payout ratio of 41%. GD is also known as a Dividend Aristocrat, as they have increased their dividend for 28 consecutive years and counting. Over the past five years, General Dynamics Corporation has increased the dividend by an average annual rate of 8.1%.

I like General Dynamics Corporation the company and their growing dividend, but the General Dynamics valuation is not all that enticing at the moment.

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