General Dynamic’s Outlook & Backlog
According to the company, it does not, as a practice, change guidance at the end of the first quarter. It is its practice and has been for many years, to give a full review of its expectation at the midpoint of the year.
However, on the first quarter conference call, CEO Novakovic said that the company is ahead of the operating plan on which its guidance was based.
Management’s initial estimates, established during the fourth quarter 2015 conference call, were for revenue of $31.6-$31.8 billion and an operating margin of 13.3%. Management also expected earnings-per-share of $9.20, up just 1% from 2015 due to higher expected interest expense, a higher tax rate, and currency headwinds.
However, General Dynamics has been conservative in its guidance which has resulted in beating expectations quarter after quarter. Therefore, I assume that the company will post better results for the year than those indicated in its latest guidance.
General Dynamics also had a massive backlog at the end of the first quarter, and it has gained some sizable contracts since then.
According to the company, there was order activity across the Gulfstream product portfolio and strong demand for defense products, which resulted in a book-to-bill ratio (orders divided by revenue) of one-to-one in the Combat Systems group and greater than one-to-one in the Information Systems and Technology group.
Total potential contract value, the sum of all backlog components, was $89.2 billion at the end of the quarter, compared to $90.6 billion at the end of the prior quarter and $96.1 billion at the end of the first quarter of 2015. Backlog according to company’s segments at the end of the first quarter is shown in the chart below.
Source: company’s report
Valuation & Final Thoughts
Since the beginning of the year, General Dynamic’s stock is up 2.2% while the S&P 500 Index has increased 3.2%, and the Nasdaq Composite Index has lost 0.8%.
However, since the beginning of 2012, General Dynamic’s stock has gained 111.3%, in this period, the S&P 500 Index has increased 67.7%, and the Nasdaq Composite Index has risen 90.7%. According to TipRanks, the average target price of the top analysts is at $158.60, an upside of 13% from its June 6 close price, which appears reasonable, in my opinion.
General Dynamic’s valuation is good, the trailing P/E is at 15.2, and the forward P/E is low at 13.9. The price to sales is at 1.4, and the price to cash flow is at 12.7. Furthermore, the Enterprise Value/EBITDA ratio is very low at 9.6.
In addition, most of General Dynamic’s Return on Capital parameters have been much better than its industry median, its sector median and the S&P 500 median as shown in the table below.
Source: Portfolio123
General Dynamics Corporation (NYSE:GD) has been able excel despite budget-cutting headwinds. However, recent budget trends have been supportive for the industry and will benefit the company.
In my view, General Dynamic’s stock is an excellent candidate for diversified, large-cap dividend stock portfolio. The company recently raised its dividend by 10.1%, it generates strong free cash flow and returns substantial capital to its shareholders by stock buybacks and dividend payments.
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The average target price of the top analysts is at $158.60, an upside of 13% from its June 6 close price, which appears reasonable, in my opinion.
Note: This article was originally published at Sure Dividend by Arie Goren.
