Global air travel demand has been steadily growing since the start of 2023, resulting in increased passenger traffic in all regions. Moreover, U.S. defense contractors have benefited as the war in Ukraine and tense US-China relations have fueled demand for weapons such as tanks, submarines, and munitions.
As a result, General Dynamics Corporation (GD), a leading aerospace and defense company, has seen steady demand growth for its products and services. It reported strong first quarter results, exceeding analysts’ revenue and EPS estimates. Moreover, the company has grown its revenue and EPS at CAGRs of 5.1% and 4.7% over the past five years.
The stock has gained marginally over the past five days, closing the last trading session at $218.13.
Given below are the factors help GD take off in May:
Robust First Quarter Performance
GD’s revenue increased 5.2% year-over-year to $9.88 billion for the fiscal first quarter ended April 2, 2023. The company’s operating earnings rose 3.3% year-over-year to $938 million. Its EPS came in at $2.66, representing an increase of 1.1% year-over-year. Its net income remained flat at $730 million.
Also, net cash provided by operating activities in the quarter totaled $1.50 billion, or 200% of net earnings. The company invested $161 million in capital expenditure and paid $345 million in dividends, ending the quarter with $2 billion in cash and equivalents.
Phebe N. Novakovic, GD’s chairman and chief executive officer, said, "Strong cash flow positions us to continue to invest in our business, retire debt and return value to shareholders."
Backlog Boom: Solid Growth Outlook
GD reported a consolidated book-to-bill ratio of 0.9-to-1 for the latest quarter. Moreover, the company-wide backlog has increased by 3% from the year-ago quarter to $89.80 billion.
In addition, the estimated potential contract value, which represents management's estimate of additional value in unfunded IDIQ contracts and unexercised options, was reported at $38.5 billion. When combined with the total backlog, the company's total estimated contract value stands at an impressive $128.40 billion. These figures indicate a strong pipeline of future business and company growth potential.
Recent Positive Developments
On April 4, 2023, GD’s business unit General Dynamics Information Technology (GDIT), announced that it was awarded the Flight School Training Support Services contract to support the U.S. Army Aviation Center of Excellence. Awarded in March, the $1.70 billion contract, has a five-year base period and seven option years.
Moreover, on March 22, GDIT announced that it was awarded two contracts totaling $380 million by the Environmental Protection Agency (EPA). The contracts expand the company's technology and scientific research and also support services to enable the agency's critical environmental and climate initiatives.
Consistent Dividend Growth
On March 8, GD declared a regular quarterly dividend of $1.32 per share on the company's common stock, payable on May 12, 2023. This marks the 26th consecutive annual dividend increase authorized by the board, representing a 4.8% increase over last year's dividend.
GD pays $5.28 annually as dividends which translates to a yield of 2.42% at the current price. Its four-year average dividend yield is 2.40%. The company’s dividend payouts have grown at a 7% CAGR over the past three years.
High Profitability
GD’s trailing-12-month net income margin of 8.50% is 27.7% higher than the 6.66% industry average. Its 4.96% trailing-12-month levered FCF margin is 10.4% higher than the industry average of 4.49%. Furthermore, the stock’s trailing-12-month EBIT and EBITDA margins of 11.07% and 13.32% are 15.9% and 1.6% higher than the industry averages of 9.56% and 13.12%.
POWR Ratings Show Promise
GD has an overall rating of B, which equates to a Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. GD has a B grade for Stability, in sync with its 24-month beta of 0.65.
GD is ranked #16 out of 70 stocks in the Air/Defense Services industry.
Click here to access GD’s Growth, Value, Momentum, and Stability.
Bottom Line
Wall Street analysts expect GD to hit $257.70 in the near term, indicating a potential upside of 18.1%.
In the fiscal first quarter, the company received various contracts from the U.S. Army, Navy, and Air Force, as well as from international partners for the production and maintenance of tanks, armored vehicles, munitions, and other military equipment.
Additionally, GD also won contracts to provide technical and support services, training, and information technology solutions to various government agencies. These awards suggest that the company is well-positioned to continue generating revenue and profits from its defense and technology businesses in the coming months and years.
With the increasing global demand for air travel and growing tensions between major countries, the aerospace and defense sector is poised for growth this year. Considering GD’s robust financials, recent positive developments, backlog boom, consistent dividend growth, and high profitability, the stock seems poised to take off in May.
How Does General Dynamics Corporation (GD) Stack Up Against Its Peers?
GD has an overall POWR Rating of B, equating to a Buy rating. Check out these other stocks within the Air/Defense Services industry with an A (Strong Buy) rating: Willis Lease Finance Corporation (WLFC), CPI Aerostructures, Inc. (CVU), and Lockheed Martin Corp. (LMT).
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GD shares were trading at $214.71 per share on Tuesday morning, down $3.42 (-1.57%). Year-to-date, GD has declined -12.50%, versus a 8.22% rise in the benchmark S&P 500 index during the same period.
About the Author: Kritika Sarmah
Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.
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