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General Dynamics (GD) quick review: Strong investment candidate

|Includes:General Dynamics Corporation (GD)

General Dynamics currently trades at $61.3 and was added to my idea pipeline as it is a legacy stock which I currently own.

 

1- Business Performance (+) and intrinsic returns (+)

Metric

Status

FCF / Sales

Last twelve month (NYSE:LTM): 7.7%, in line with GD’s historical performance between 6% and 9%

ROE

LTM: 20%, consistent with the company’s historical performance and average of 20.6 over the last 5 years

ROA

LTM: 8.1%, again in line with GD’s 5 and 10-year averages

Revenue Growth

The company has been slowing down a bit, with growth of ~7% to 9% in recent years vs. historical year over year growth rates of 13%+

Cash distribution to shareholders

GD’s dividend yield of 2.6% is in line with that of the S&P500, on a payout of about 25%.

GD is an “irregular” buyer of shares, buying 5% of its shares back over the last 5 years with some years of net increases and large buybacks in 2008 (a smart move!).

GD is a strong business with recent performance very much in line with historical averages. The company generates a reasonable amount of cash vs. its sales and has high ROE/ROA’s. The only ‘concern’ would be a slowing down of growth.

In terms of returns, with a yield of 2.5% on a 25% payout ratio, the company could finance a 7-8% growth by using 40% of its earnings (@20% ROE) and use the remainder, 35% to buy back 3.5% of its shares based on the current earnings yield of 10.2%. This would give us an intrinsic return of up to 13% depending on GD’s ability to grow.

 

2- Balance Sheet Risk (+)

Metric

Status

LT Debt / Equity

Currently at 0.25x and has been decreasing regularly from 0.6x in 2003

Current Ratio

1.3x in line with historical ranges between 1.1x and 1.3x

Very limited debt and reasonable current ratio given pre-ordered nature of the business.  The Balance Sheet risk appears limited.

 

3- Valuation Risk (+)

Metric

Status

Cash Return

9.6%

P/E

9.8x, below the S&P and the company’s 5 year average of 14x+

GD’s valuation appears low both on a cash return, with the company being valued including debt at less than 10x FCF, and on a P/E basis.

 

Conclusion

GD appears to be a robust and stable business with little balance sheet risk and a relatively low valuation which may provide a good margin of safety to a new or existing investor. I will perform a Company analysis of GD.



Disclosure: Long GD
Stocks: GD