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General Dynamics’ Growth Prospects Marred by Intense Rivalry


We issued an updated research report on defense giant, General Dynamics Corp. GD on May 16. General Dynamics’ diverse product portfolio, along with its spread-out customer base, provides it an opportunity to generate revenues from different sources. Yet, majority of its revenues still comes from the U.S. government, thereby exposing it to substantial risks if any fall in orders or defense budget cuts takes place.

Ex-President Obama's fiscal 2017 budget proposal called for $582.7 billion in funding from the Pentagon that included $71.4 billion for research and development (R&D) and $8.1 billion for submarines (with over $40 billion in the next five years). General Dynamics, being one of the only two contractors in the world equipped to build nuclear-powered submarines, will surely benefit from this.

Moreover, the company’s Aerospace segment continues to witness strong improvement. This is evident from its first-quarter 2017 revenues and operating margin expansion, courtesy of the operating efficiency gained from the Gulfstream business. Going ahead, similarly high revenues and earnings can be expected in 2017, as the G500 is expected to duly enter service this year.

The company's R&D expenses increased 8.7% year over year in the first quarter. This, in turn, will facilitate the introduction of products and first-to-market enhancements.

General Dynamics’ share price gain of 33.1% in the last one year outperformed the Zacks categorized Aerospace-Defense industry’s 19.2% gain, probably buoyed by the aforementioned positives.

In Mar 2017, the U.S. House of Representatives passed an overdue $578 billion defense spending bill for fiscal 2017. However, the measure faces an uncertain future in the Senate, where Democrats will be unwilling to advance it on its own. If any downward change takes place under the Senators, it will affect growth of U.S. defense giants like General Dynamics.

Moreover, a comparative analysis of the company’s historical EV/EBITDA ratio reflects a relatively gloomy picture that might be a cause for its investors’ concern. Evidently, the stock currently has a trailing 12-month EV/EBITDA ratio of 12.67, which is higher than the average level of 9.32 and nearer to its high of 12.70 over this period. General Dynamics is also overvalued when compared to its broader sector’s EV/EBITDA ratio of 12.05 over the last one year.

Moreover, the company faces intense competition from other defense majors in the market like Huntington Ingalls Industries, Inc HII, Lockheed Martin Corp. LMT and The Boeing Company BA, all of which belong to the same Aerospace-Defense industry.

Zacks Rank

General Dynamics currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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