General Dynamics Corporation
(
GD
) has been awarded a contract to develop and deploy modernized
range instrumentation radars, replacing an aging and outdated fleet
of radar systems currently operating at U.S. Army test ranges. The
Range Radar Replacement Program (RRRP) has a total potential value
of $385 million over ten years if all options are exercised. The
initial award, valued at $29 million, provides funding for the
engineering, manufacturing and development phase of the program and
initial production and integration of the new radar systems at
White Sands Test Center, New Mexico; Yuma Test Center, Arizona;
Aberdeen Test Center, Maryland; and Redstone Test Center,
Alabama.
Work will be performed in Scottsdale; Kilgore, Longview and
Richardson, Texas; State College, Pennsylvania; Hilliard, Ohio;
Reston, Virginia; Fort Walton Beach and Melbourne, Florida; and
Atlanta.
Earlier, General Dynamics posted mixed results for the March
quarter, surpassing the Zacks Consensus Estimate on the top line
but missing the forecast at the bottom. Looking forward, key
drivers include the improving business jet market, its stable
business of U.S. military vehicles, a backlog of over $55 billion,
an ongoing share repurchase program and strong cash flow
generation.
However, the company is largely tied to the U.S. defense budget,
where the threat of budget cut is looming. Also, we have turned
slightly cautious about the company's steadily dropping order
backlog, and risks related to the execution of key projects.
Headquartered in Falls Church, Virginia, General Dynamics
engages in mission-critical information systems and technologies;
land and expeditionary combat vehicles, armaments and munitions;
shipbuilding and marine systems; and business aviation. The company
operates through four segments: Information Systems &
Technology (IS&T), Combat Systems, Marine Systems, and
Aerospace.
General Dynamics was the third largest U.S. defense contractor
in terms of revenue in fiscal 2011, after
The Boeing Company
(
BA
) and
Lockheed Martin Corporation
(
LMT
). The company is one of two contractors equipped to build
nuclear-powered submarines in the U.S.
General Dynamics continues to benefit from strong congressional
support for its programs in the 2012 defense budget. The U.S.
defense budget for 2012 was $645.7 billion, with the base budget at
$530.6 billion and $115.1 billion approved for Overseas Contingency
Operations ("OCO") as supplementary defense spending, mainly to
fund ongoing wars.
In February this year, the Department of Defense (DoD) requested
a Pentagon base budget of $525.4 billion for 2013, which is
approximately $5.1 billion or 1% less than what is approved for
fiscal 2012, with $88.5 billion earmarked for OCO spending. The
significant reduction in OCO funding is mainly due to the decline
of U.S. military operations in Iraq in 2011. Going forward, OCO
funding is expected to continue to decline as troops redeploy out
of Afghanistan.
For the future, the company's focus will be on the revival of
the business jet market (Gulfstream) along with programs such as
the Warfighter Information Network Tactical (WIN-T) program and
Joint Tactical Radio System (JTRS) in the IS&T division.
Similarly, the Combat Systems and Marine Systems segments will
receive a boost from higher volumes in the U.S. military vehicle
business (Stryker combat vehicles and Abrams tanks) and ship
programs DDG-51, Virginia class submarines and the Mobile Landing
Platform program.
General Dynamics has one of the strongest balance sheets among
its peers with a low long-term debt-to-capitalization of 20.5% at
the end of the first quarter of 2012 (Zacks Industry Average was
44.3%). Earlier, General Dynamics' free cash flow from operations
reached $2.8 billion in fiscal 2011. Management returns a
substantial portion of its free cash flow to shareholders through
share repurchases and incremental dividends. The company
repurchased 18.9 million shares during fiscal 2010 and 20 million
shares during fiscal 2011. Also, in March 2012, the company raised
its regular quarterly dividend by 8.5% to $0.47 per share.
General Dynamics' total order backlog steadily decreased to
$55.2 billion at the end of the first quarter of 2012 from $59.6
billion at fiscal-end 2010. Going forward, the U.S. economic
fundamentals are basically being kept on a leash as the Euro-crisis
continues to cast its spell over the financial markets, keeping
risks of further cutbacks in future defense budgets at a high
level. Our apprehension is fueled by $15 trillion of national debt
and an unemployment rate hovering around 8.1% which would lead to
the Budget Control Act's dictum of automatic cutbacks across the
board going forward.
Going by the pulse of the economy and given the pros and cons,
we prefer to maintain our long-term Neutral recommendation on the
stock. Moreover, General Dynamics holds a Zacks #3 Rank that
translates into a short-term Hold rating.
BOEING CO (BA): Free Stock Analysis Report
GENL DYNAMICS (GD): Free Stock Analysis Report
LOCKHEED MARTIN (LMT): Free Stock Analysis
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