GD Spells Dynamic Growth

02/27/2007 12:00 am EST

Focus:

Richard Moroney

Editor, Dow Theory Forecasts

Stock Ticker GD

Richard Moroney, editor of Dow Theory Forecasts, thinks General Dynamics is a blue-chip company that will continue to prosper as military spending rises. The stock also looks reasonably priced, he says. 

General Dynamics ($78, NYSE:GD)does a lot more than build tanks and submarines. The company, among the most diversified defense contractors, is also a major player in the markets for computer networks and commercial aircraft.

While General Dynamics does sell to a growing number of commercial customers, the majority of revenues still come from contracts with the US military. Chief among growth drivers are acquisitions in the technology segment and rising demand for combat vehicles, weapons, and business aircraft. General Dynamics is a buy and a long-term buy.

General Dynamics operates through four business groups: information systems and technology provides tactical and intelligence mission systems, satellites, network infrastructure, and a variety of information-technology services. Revenue rose 15% in 2006 to $9.0 billion (38% of total sales), with acquisitions contributing much of the growth. Delays in new programs stalled organic growth in 2006 after four-years of double-digit gains.

Combat systems makes armored vehicles, tanks, guns, and ammunition. Sales rose 19% in 2006 to $6.9 billion (25% of sales), while profits climbed 18%. The war in Iraq has helped this business unit, creating strong demand for military vehicles and armaments.

Marine systems builds submarines and surface-warfare and logistics ships and also provides marine overhaul and repair services. Sales rose 5% in 2006 to $4.9 billion (21%).

Profit margins improved substantially, and earnings jumped 51%. Last year, efficiency improvements boosted profit margins for a large contract to supply destroyers to the US Navy. Those gains offer optimism about future bottom-line growth from the destroyer contract, under which General Dynamics is slated to deliver seven more vessels by 2011.

Aerospace makes business jets under the Gulfstream brand name. Sales increased 20% in 2006 to $4.1 billion (17%) while earnings jumped 30%. Demand for aircraft remains high, and the unit's delivery schedule is nearly sold out for 2007.

General Dynamics' sales to the US military will likely continue to rise as defense spending picks up. The Pentagon's supplemental budget is expected to jump 50% in 2007 to approximately $99.7 billion, and initial estimates indicate the total defense budget could reach $640 billion. General Dynamics is likely to capture plenty of the additional spending.

Rising backlog-up 7% at yearend 2006 to $43.7 billion - and a steady stream of new contracts bode well for 2007 earnings growth. General Dynamics landed nearly $7 billion in contracts in the four months ended January.

General Dynamics' shares have risen 36% over the last year. But at 17 times estimated 2007 earnings of $4.74 per share, the stock remains reasonably valued, with a forward P/E slightly below its peer-group average. Consensus estimates project per share-profit growth of 13% in 2007.

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