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General Dynamics (NYSE:GD) is a defense and aerospace company. This article will look at the company, compare the aerospace division with peers and conclude with an outlook.

General Dynamics was the 5th largest defense contractor in 2012. Lockheed Martin (NYSE:LMT), Boeing (NYSE:BA), BAE Systems (OTCPK:BAESF)(OTCPK:BAESY) and Raytheon (NYSE:RTN) precede General Dynamics as defense contractors. All of these companies have been reviewed previously in the aerospace article series.

FUNDAMENTALS1

Corporate201320122011201020092008
Revenue$31,218$31,513$32,677$32,466$31,981$29,300
Net income$2,357-$332$2,526$2,624$2,394$2,459
EBIT$3,693$697$3,859$3,947$3,673$3,670
EBIT%11.83%2.21%11.81%12.16%11.48%12.53%
FCF$2,666$2,237$2,780$2,616$2,470-$590
EPS$6.67-$0.94$6.87$6.81$6.176.17
Dividend $2.04$1.88$1.68$1.52$1.40
Dividend Yield 2.08%
ROA6.65%-0.97%7.24%8.06%7.70%8.67%
ROCE15.88%3.07%16.26%18.47%17.74%20.37%
ROE16.25%-2.91%19.09%19.71%19.27%24.46%
PE (Price/Earnings)14.74

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General Dynamics is divided in the following divisions:

Aerospace: consists of Gulfstream Aerospace which designs, produces and maintains Gulfstream business aircraft and Jet Aviation which provides business aviation services.

Aerospace201320122011201020092008
Revenue$8,118$6,912$5,998$5,299$5,171$5,512
EBIT$1,416$858$729$860$707$1,021
EBIT%17.44%12.41%12.15%16.23%13.67%18.52%

Combat Systems: are involved in military vehicles, weapons systems and munitions.

Combat Systems201320122011201020092008
Revenue$6,120$7,992$8,827$8,878$9,645$8,194
EBIT$904$663$1,283$1,275$1,262$1,111
EBIT%14.77%8.30%14.53%14.36%13.08%13.56%

The decline in revenue is caused by budget cuts (in the US and Europe) and several contracts nearing completion.

Marine Systems: build submarines and surface ships and is one of two primary shipbuilders for the US Navy.

Marine Systems20132012201120102009
Revenue$6,712$6,592$6,631$6,677$6,363
EBIT$666$750$691$674$642
EBIT%9.92%11.38%10.42%10.09%10.09%

Information Systems and Technology: provides products and services with regard to government and commercial communications and information sharing. The portfolio consists of:

  • Secure mobile communications;
  • IT solutions and mission support services;
  • Intelligence, surveillance and reconnaissance systems.
Information Systems and Technology201320122011201020092008
Revenue$10,268$10,017$11,221$11,612$10,802$10,038
EBIT$795-$1,369$1,200$1,219$1,151$1,075
EBIT%7.74%-13.67%10.69%10.50%10.66%10.71%

The large drop of EBIT in 2012 was primarily caused by a $2B impairment of goodwill, caused by disappointing acquisitions which didn't meet expectations.

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PEERS

General Dynamics and most other business aircraft manufacturers don't provide financial information detailed enough to be used for comparison.

In most cases business aircraft are included in a general overview of aviation manufacturing activities.

This comparison is based on delivered aircraft; these figures are more reliable than orders.

The main competitors are:

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General Dynamics has the 2nd position for new business aircraft after Bombardier. Especially 2013 has been a good year.

Something odd popped up when comparing General Dynamics and Dassault Aviation; they are the most comparable because their business aircraft are in separate divisions. The following applies:

  • General Dynamics is delivering more aircraft;
  • Gulfstream aircraft are generally larger than Dassault Falcon aircraft;
  • General Dynamic's Jet Aviation has 4500 employees worldwide which implies a much larger organisation;
  • There are more Gulfstream than Falcon aircraft in use worldwide;
  • Profitability of General Dynamics Aerospace is not much higher than Dassault Aviation (as a whole) up to 2012.
  • In 2012 General Dynamics EBIT% rises with a staggering 5%. Dassault's results for 2013 are not published yet.

Yet the difference in revenue between General Dynamics and Dassault isn't large. The revenue per delivered aircraft-chart is only meant as a way to visualize and compare performance because no other data is available.

(click to enlarge)2

The annual reports and other news didn't point to a straightforward cause of this strange discrepancy. Possible explanations might be:

The decrease in profitability of JetAviation. In 2012 a large impairment of goodwill on JetAviation was done and 3 European based maintenance facilities were closed. General Dynamics might be in the process of divesting JetAviation.

Dassault Aviation reported a wait-and-see mentality with North American customers, although about a third of the Falcon business aircraft revenue is generated in the US.

FUTURE

General Dynamics generates about 79% of revenue in the United States (of which 66% is from the US government). This regional dependence and dependence on a single client is a risk.

General Dynamics is a strategic industry for the US government (with the exception of the business aircraft). Revenue will come, but budget restrains or government shutdown will directly influence the results.

Because of this General Dynamics doesn't have a lot of growth potential in the near future. However, General Dynamics has a decisive management that is not afraid to make decisions, divest if necessary and counter problems.

INVESTING

General Dynamics has a stable EBIT and impressive EBIT%, but revenue is sliding. This is caused by government cuts and will remain under pressure in the near future.

The only division with commercial growth potential is the Aerospace division.

General Dynamics pays a healthy dividend and is not expensive at the moment.

Footnotes

1. Financial data sources are from annual and other reports published by General Dynamics.

  • Stock price used: USD 98.31

2. All charts are created by Confero.

Source: General Dynamics: Sound And Solid