We came across a bullish thesis on General Dynamics Corp (GD) on ValueInvestorsClub by jagger. In this article, we will summarize the bulls’ thesis on GD. GD’s stock was trading at $290.90 when this thesis was published, vs. a closing price of $309.46 on Oct 18.
General Dynamics is a worldwide aerospace and defense company with a market capitalization of $80 billion. It operates across four major segments: Aerospace, Marine Systems, Combat Systems, and Technologies, and offers a variety of products and services. Currently, GD brings $42.3 billion in revenue, $3.3 billion in net income, and $3.8 billion in FCF. Further, it has a strong balance sheet with $8.2 billion of net debt, and hence the leverage ratio is as high as 1.5x.
There are three observations to make when assessing GD’s investment thesis. First, in the Gulfstream business, everything stands out with the excellent product range and a superb backlog worth $21 billion. The new products in the pipeline including the G700, G800, and G400 are expected to create the buzz. Of course, there were some worries about margins in the first quarter, but it is going to get better, especially with improving R&D costs.
Second, GD may not be as flashy as LMT or NOC; however, GD has its part in helping the DoD with munitions and addressing threats worldwide. Notably, GD has a superb chance of growth with a $44 billion backlog in Marine Systems and another $58 billion in Combat Systems and Technologies.
Last but not least, GD’s capital deployment also contributes to the increase in EPS growth strategy. It produced $3.8 billion of FCF in 2023 and has an amazing 115% earnings conversion that should continue through 2025. In the first quarter of 2024, it has repurchased 390,000 shares for $105 million and is gearing up for more such purchases in the coming months.
Considering such numbers, GD is traded at 14x EBITDA and 18x earnings, as well as has a 5.6% FCF yield. However, what is really noteworthy is the fact that despite its superior growth prospects and high cash conversion rates, GD is now trading in line with its competitors. That said, GD can command a premium value, especially considering the positive trends in its business areas.
However, a recession may limit Gulfstream’s growth rate; GD enjoys significant defense backlogs that should provide some cushion. As a result, GD shares could grow in value at a mid-teens level on an annual basis at an attractive rate.
While we acknowledge the potential of GD as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than GD but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.
