On Jul 2, 2013 we have upgraded our recommendation on one of
the major defense contractors
General Dynamics Corp.
) to Neutral from Underperform.
BOEING CO (BA): Free Stock Analysis Report
EMBRAER AIR-ADR (ERJ): Free Stock Analysis
GENL DYNAMICS (GD): Free Stock Analysis
NORTHROP GRUMMN (NOC): Free Stock Analysis
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Why the Upgrade?
General Dynamics engages in mission-critical information systems
and technologies; land and expeditionary combat vehicles,
armaments and munitions; shipbuilding and marine systems; and
Even though the defense major reiterated its 2013 earnings
guidance on flattish revenues, its first quarter results reflect
some positive trends. Jet sales at the Gulfstream business are
continuing to see traction even in the slowing defense sales
scenario. The $60 million top-of-the-line G650 large cabin
business jet is in high demand, with orders booked for the next
five years. Gulfstream is expected to contribute more
significantly to General Dynamics' earnings going forward.
General Dynamics has rewarded shareholders by returning a
substantial portion of its free cash flow through share
repurchases and incremental dividends over the years. During the
last reported quarter, it has also boosted shareholder wealth via
$70 million worth of buybacks and a 10% dividend hike. This
dividend hike marks the 16th consecutive annual increase and has
a dividend yield of 2.80%. Its practice of raising dividends
consistently will benefit the stock and attract investor
Although we remain a little apprehensive over its declining
backlog, which witnessed a 5.5% sequential as well as 12.3% year
over year fall during the first quarter, the company managed to
clinch quite a few significant contracts in the recent past. On
Jun 4, 2013, General Dynamics won a contract, worth $2.84
billion, from the Department of Defense (DoD) and the U.S. Navy
to construct four Arleigh Burke-class destroyers.
With respect to the present valuation, General Dynamics also
looks attractive. The forward price/earnings (P/E) multiple of
11.8x is lower than the peer group average of 14.7x, reflecting a
discount of 19.7%. The price/book (P/B) multiple of 2.4x is also
lower than the peer group average of 3.1x. In addition, the
company's operational efficacy is apparent in its Return on
Investment (ROI) of 14.2%, which is higher than the peer group
average of 12.5%.
Other Stocks to Consider
General Dynamics currently retains a Zacks Rank #3 (Hold). Other
stocks from the sector that are presently performing well include
The Boeing Company
Northrop Grumman Corp.
), all with a Zacks Rank #2 (Buy).