Despite A Down Quarter General Dynamics Still Looks Solid

| About: General Dynamics (GD)

General Dynamics (NYSE:GD) is yet another of the large defense and aerospace contractors to report in the past week. The company reported a decline in profit and income despite solid revenue. Even so diverse product lines are making the near term look good and should cushion some of the changes in U.S. defense spending.

GD was not down due to loss of defense business or pension charges like Boeing (NYSE:BA) or Lockheed Martin (NYSE:LMT) but due to charges related to its civilian aviation business line. This seriously affected the fourth-quarter results when compared with the previous year's and they were well below analyst predictions. The stock was down slightly for the week, closing Friday at $70.35.

The company reported a decline in net income of twenty-three cents a share when compared with last year's quarter at $1.68. Estimates had been even higher at $1.99 a share. Sales though were up 6 percent to just over $9 billion.

The company had to take charges on its Swiss-based Jet Aviation Unit, which provides maintenance, repair and overhaul services as well as business jet leasing to a wide variety of customers. One was related to the cost of jet fuel and the other was due to the delays in finishing several aircraft. The company though remains confident in this part of its business and expects growth and revenue from it.

GD's other civil aviation unit, Gulfstream, had a good quarter with the first orders for its new executive jet the G650 being taken. The G650 is a very advanced aircraft and builds upon the success of the Gulfstream line, in production for several years. The executive jet business is recovering from a steep fall it took after the 2008 economic downturn.

Defense contracts remain the core of the company and there is concern that the proposed cuts in the next five to 10 years will affect the bottom line. GD makes submarines, ships and armored vehicles along with providing a variety of services to the U.S. military. The company has made several recent acquisitions recently, most importantly of Vangent Inc. and Force Protection.

Vangent provides healthcare IT and builds on some contracts that GD already has with the government. It will allow GD to expand into electronic health records as well as gain a larger share of the Medicare and Medicaid management market. If the recent healthcare reforms enacted by President Obama go into affect this market could grow quite a bit.

Force Protection makes armored vehicles, primarily Mine Resistant Ambush Protected ones that the U.S. and its allies invested heavily in during 2005-2010 for use in Iraq and Afghanistan. Force Protection had seen some struggles and GD now gains manufacturing capability in business friendly South Carolina, and an established line of vehicles that it can provide services too.

Overall the company maintains that it will provide $7.10 to $7.20 a share for all of 2012, which is below analysts' estimates of $7.62. In 2011 the company overall had a flat year with sales increasing about 1 percent to $32.7 billion. 2012 is expected to be slightly higher at $34 billion.

GD is moving to cushion itself from the fall in defense spending but its dependence on several large programs may make this difficult and in 2013-2017 earnings could be affected. The hope that the civil aircraft market will continue to grow, providing some relief, now looks good but another economic downturn would affect those sales perhaps dramatically, as it did four years ago. That would then put even more pressure on GD's other components. It might be a tough few years ahead for all major defense contractors as the final budget plans are worked out and executed.

Even so GD might have some more upside then its competitors. A more diverse business base should help it maintain its performance. The stock price should remain steady and the 47 cent dividend should be paid. The company has previously stated that it intends to continue acquisitions that either grow its business or expand markets. Expect it to do so especially as the defense cuts could make many smaller to midsized defense companies available.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.