On Feb 4, 2013, we downgraded defense and aerospace operator,
General Dynamics Corporation
) to Underperform based on the company's dismal fourth quarter
and full year 2012 financial results. The company currently has a
short-term Zacks Rank #5 (Strong Sell).
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Why the Downgrade?
General Dynamics recently reported lackluster 2012 results. The
company posted fourth quarter 2012 earnings of $1.39 per share,
missing the Zacks Consensus Estimate of $1.90 per share. Reported
quarter revenue of $8.08 billion failed to meet the Zacks
Consensus Estimate by $731 million. The downside reflects huge
charges at its information systems business and a revenue decline
at European Land Systems.
Currently, the Zacks Consensus Estimate for 2013 is $1.61, an
estimated decline of 5.29% year over year.
Cause for Concern
The company's Gulfstream business is facing lower demand and the
Jet Aviation business is not doing too well either. The Jet
business has particularly been hit by the economic crisis in
Europe. To add to the woes of Jet Aviation, the competitive
scenario has become more intense with original equipment
manufacturers now grabbing contracts and taking away a slice of
the business pie.
Meanwhile the Information Systems & Technology (IS&T)
segment is experiencing top-line pressure as a result of defense
spending cuts and margin compression from an unfavorable mix
shift and cost performance. Going forward, continuing growth in
the IS&T segment is critical, since it has the potential to
be the primary growth driver in situations where cuts in defense
spending could hinder growth in other operating segments.
Though the company is working on a restructuring plan to
eliminate excess capacity and align the size of its European
business with future demand, uncertainty related to the defense
budget and U.S. debt situation remains an overhang.
Other Stocks to Consider
While we prefer to avoid General Dynamics until we see signs of
improvement in the company's performance, other defense stocks
worth a look are
Huntington Ingalls Industries, Inc.
Esterline Technologies Corp.
) with a Zacks Rank #1 (Buy), and
Lockheed Martin Corporation
) with a Zacks Rank #2 (Buy).