BUSINESS
General Dynamics Corporation operates as an aerospace and defense company worldwide. It operates through four segments: Aerospace, Marine Systems, Combat Systems, and Technologies. The Aerospace segment designs, manufactures, and sells business jets; and offers aircraft maintenance and repair, management, charter, aircraft-on-ground support and completion, staffing, and fixed-base operator services. The Marine Systems segment designs and builds nuclear-powered submarines, surface combatants, and auxiliary ships for the United States Navy and Jones Act ships for commercial customers, as well as builds crude oil and product tankers, and container and cargo ships.
INVESTMENT RATING
Reflecting future returns on capital that are forecasted to be above the cost of capital, GD is expected to continue to be a major Value Builder.
General Dynamics has a current Value Trend Rating of C (Neutral).
With this rating, PTR’s two proprietary measures of a stock’s current attractiveness are providing very contradictory signals. General Dynamics has a poor Appreciation Score of 18 but a good Power Rating of 84, resulting in the Neutral Value Trend Rating.
General Dynamics’ stock is selling well above targeted value. The current stock price of $293.13 compares to targeted value 12 months forward of $213.
General Dynamics’ low appreciation potential results in an appreciation score of 18 (82% of the universe has greater appreciation potential.)
General Dynamics has a Power Rating of 84. (GD’s good Power Rating indicates that it has a higher likelihood of achieving favorable investment performance over the near to intermediate term than all but 16% of companies in the universe.)
Factors contributing to this good Power Rating include: recent price action has been favorable; and the Aircraft comparison group is currently in a modestly favorable position. An offsetting factor is earnings estimate behavior for GD has been slightly negative recently.
INVESTMENT PROFILE
GD’s financial strength is high. Financial strength rating is 80.
Relative to the S&P 500 Composite, General Dynamics Corp has neutral Growth/Value characteristics; its appeal is likely to be to investors neutral towards Income; the perception is that GD is lower risk. All factors are relative strengths. GD’s valuation is moderate: moderate dividend yield, moderate P/E ratio, and moderate price/book ratio. GD has high market capitalization.
CURRENT SIGNALS
General Dynamics’ current operations are eroding. Return on equity is falling, reflecting: declining pretax margin; falling tax keep rate; and falling leverage.
General Dynamics’ current technical position is very strong. The stock price is in a 10.5 month up move. The stock has appreciated 43.8% from its prior low. The stock price is above its 200 day moving average which is in an uptrend.
ALERTS
The stock is currently rated C.
On 4/8/24, General Dynamics Corp (NYSE: GD) stock declined slightly by -0.7%, closing at $293.13. This decline was accompanied by normal trading volume. Relative to the market the stock has been exceptionally strong over the last nine months and has risen 3.8% during the last week.
CASH FLOW
In 2023, General Dynamics generated a very significant increase in cash of +$671 million (+54%). Sources of cash were much larger than uses. Cash generated from 2023 EBITDA totaled +$5,108 million. Non-operating sources contributed +$138 million (+3% of EBITDA). Cash taxes consumed -$699 million (-14% of EBITDA). Re-investment in the business amounted to -$1,862 million (-36% of EBITDA). On a net basis, debt investors removed -$1,430 million (-28% of EBITDA) while equity investors received -$584 million (-11% of EBITDA).
General Dynamics’ Non-operating Income, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by stability for the General Dynamics Peer Group as well. In most years, General Dynamics was in the second quartile. Currently, General Dynamics is substantially above median at +3% of EBITDA (+$138 million).
General Dynamics’ Cash Taxes, %EBITDA has exhibited a minor overall uptrend over the period. This improvement was accompanied by a similar trend for the General Dynamics Peer Group. In most years, General Dynamics was in the top quartile and second quartile. Currently, General Dynamics is slightly above median at -14% of EBITDA (-$699 million).
General Dynamics’ Business Re-investment, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the General Dynamics Peer Group. In most years, General Dynamics was in the third quartile and top quartile. Currently, General Dynamics is below median at -36% of EBITDA (-$1,862 million).
General Dynamics’ Debt Investors, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the General Dynamics Peer Group. In most years, General Dynamics was in the lower quartile and second quartile. Currently, General Dynamics is lower quartile at -28% of EBITDA (-$1,430 million).
General Dynamics’ Equity Investors, %EBITDA has enjoyed a very strong overall uptrend over the period. This improvement was accompanied by a similar trend for the General Dynamics Peer Group. In most years, General Dynamics was in the second quartile and lower quartile. Currently, General Dynamics is upper quartile at -11% of EBITDA (-$584 million).
General Dynamics’ Change in Cash, %EBITDA has experienced a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the General Dynamics Peer Group. (Since 2021 Change in Cash, %EBITDA has accelerated very sharply.) In most years, General Dynamics was in the third quartile and lower quartile. Currently, General Dynamics is slightly below median at +13% of EBITDA (+$671 million).
General Dynamics’ Cash, %Revenue has experienced a small downtrend over the period. This downtrend was accompanied by a similar trend for the General Dynamics Peer Group. In most years, General Dynamics was in the lower quartile. Currently, General Dynamics is lower quartile at +5%.
PROFITABILITY
General Dynamics’ return on equity has eroded very significantly since 2014. The current level of 15.6% is at the low for the period and is -31.1% from the high.
This very significant erosion was due to very strong negative trend in pretax operating return and little change in non-operating factors.
The productivity of General Dynamics’ assets declined over the full period 2014-2023: asset turnover has suffered a strong overall downtrend.
General Dynamics’ pretax margin experienced a strong overall downtrend over the period 2014-2023.
Non-operating factors (income taxes and financial leverage) had little influence on return on equity.
General Dynamics’ return on equity is substantially below median (15.6%) for the four quarters ended December, 2023.
Operating performance (pretax return on assets) is at median (7.3%) reflecting asset turnover that is at the upper quartile (0.77X) and pretax margin at the lower quartile (9.4%).
Tax “keep” rate (income tax management) is at median (83.2%) resulting in after tax return on assets that is at median.
Financial leverage (leverage) is lower quartile (2.57X).
GROWTH RATES
Overall, General Dynamics’ growth rate has slowed considerably in recent years.
General Dynamics’ historical income statement growth has been in line with balance sheet growth. Revenue growth has paralleled asset growth; earnings growth has paralleled equity growth.
Annual revenue growth has been 5.4% per year.
Total asset growth has been 7.9% per year. (More recently it has been 3.9%.)
Annual E.P.S. growth has been 4.7% per year.
Equity growth has been 9.8% per year.
General Dynamics’ consensus growth rate forecast (average of Wall Street analysts) is 13.1% — substantially above the average of the historical growth measures.
Relative to the General Dynamics Peer Group, General Dynamics’ historical growth measures are erratic. Equity growth (9.8%) has been at median. Total asset growth (7.9%) has been at the lower quartile. Revenue growth (5.4%) has been lower quartile. E.P.S. growth (4.7%) has been lower quartile.
Consensus growth forecast (13.1%) is at median.
PRICE HISTORY
Over the full time period, General Dynamics’ stock price performance has been good. Between June, 2013 and April, 2024, General Dynamics’ stock price rose +274%; relative to the market, this was a +16% gain.
TOTAL INVESTMENT RETURNS
Current annual total return performance of 22.6% is above median relative to the S&P 500 Composite.
In addition to being above median relative to S&P 500 Composite, current annual total return performance through February, 2024 of 22.6% is slightly above median relative to General Dynamics Corp Peer Group.
Current 5-year total return performance of 12.6% is above median relative to the S&P 500 Composite.
Through February, 2024, with above median current 5-year total return of 12.6% relative to S&P 500 Composite, General Dynamics’ total return performance is below median relative to General Dynamics Corp Peer Group.
VALUATION BENCHMARKS
Relative to S&P 500 Composite, GD’s overall valuation is normal. The highest factor, the price/equity ratio, is slightly above median. Ratio of enterprise value/earnings before interest and taxes is slightly above median. Ratio of enterprise value/assets is slightly above median. Price/earnings ratio is at median. The lowest factor, the ratio of enterprise value/revenue, is near the lower quartile.
Relative to General Dynamics Peer Group, GD’s overall valuation is low. The highest factor, the ratio of enterprise value/earnings before interest and taxes, is at median. Ratio of enterprise value/assets is below median. Price/earnings ratio is below median. Ratio of enterprise value/revenue is at the lower quartile. The lowest factor, the price/equity ratio, is near the lower quartile.
General Dynamics has a major value gap compared to the median valuation. For GD to rise to median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 2.16X to 2.93X. If GD’s ratio of enterprise value/revenue were to rise to 2.93X, its stock price would be lower by $118 to $411.
For GD to hit lower quartile valuation relative to the General Dynamics Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 2.16X to 2.13X. If GD’s ratio of enterprise value/revenue were to fall to 2.13X, its stock price would decline by $-5 from the current level of $293.
VALUE TARGETS
Reflecting future returns on capital that are forecasted to be above the cost of capital, GD is expected to continue to be a major Value Builder.
General Dynamics’ current Price Target of $184 represents a -37% change from the current price of $293.13.
General Dynamics’ low appreciation potential results in an appreciation score of 18 (82% of the universe has greater appreciation potential.)
Notwithstanding this low Appreciation Score of 18, the high Power Rating of 84 results in an Value Trend Rating of C.
General Dynamics’ current Price Target is $184 (-35% from the 2023 Target of $283 and -37% from the 04/08/24 price of $293.13). This dramatic fall in the Target is the result of a +2% increase in the equity base and a -37% decrease in the price/equity multiple. The forecasted decline in growth has a very large negative impact on the price/equity multiple and the forecasted increase in cost of equity has a very large negative impact as well. Partially offsetting these Drivers, the forecasted increase in return on equity has a very large positive impact.
PTR’s return on equity forecast is 21.1% — above our recent forecasts. Forecasted return on equity suffered a dramatic, variable decline between 2015 and 2023. The current forecast is well below the 2018 peak of 27%.
PTR’s growth forecast is 0.0% — below our recent forecasts. Forecasted growth enjoyed a dramatic, erratic increase between 2016 and 2023. The current forecast is significantly below the 2020 peak of 12%.
PTR’s cost of equity forecast is 9.9% — slightly above recent levels. Forecasted cost of equity enjoyed a dramatic, erratic decline between 2015 and 2023. The current forecast is below the 2018 peak of 13.2%.
At General Dynamics’ current price of $293.13, investors are placing a positive value of $83 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 8.0% per year, and a return on equity of 14.4% versus a cost of equity of 7.1%.
PTR’s 2025 Price Target of $184 is based on these forecasts and reflects an estimated value of existing assets of $236 and a value of future investments of $-52.
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