According to a Form 4 filed with the SEC, William Osborn directly purchased 5,000 shares of General Dynamics Corporation (NYSE:GD) on February 1st at an average price of $66.48 per share. Osborn serves on the Board of Directors at General Dynamics and so this transaction had to be reported as an insider purchase. He now owns nearly 12,000 shares of the stock and so this is a significant percentage increase in his holdings. On average, stocks bought by insiders tend to outperform the market (see our overview of studies on insider trading) since the principles of diversification work against insider purchases and so they should tend to occur when the insider is particularly confident that the stock price will rise. However, we had recently reported on Osborn buying shares of another company where he sits on the Board, Abbott Laboratories (NYSE:ABT) (read our analysis of that insider purchase); it’s possible that these insider purchases are casual in nature, or that he is generally bullish on the stock market and expressing that view through these two stocks among others.
General Dynamics Corporation is a $23 billion market cap company whose products include aircraft, military combat vehicles, and ships and submarines. The stock price has fallen 9% in the last year, against a rising S&P 500, on plans by the federal government to reduce its spending in general and military spending in particular. Obviously the U.S. government is a leading customer for General Dynamics, responsible for the majority of the company’s revenue. Last quarter, General Dynamics reported a 12% decrease in revenue compared to the fourth quarter of 2011. Special charges resulted in operating and net losses; when the company corrected for those factors, earnings per share for the quarter came out to $1.39 which was still down from $1.68 a year ago. Analyst estimates for 2013 imply a current-year P/E of 10, with the stock trading at 9 times forward earnings estimates.
Warren Buffett has been an investor in General Dynamics Corporation, with Berkshire Hathaway reporting a position of 3.9 million shares in its 13F filing for the end of September 2012 (check out Buffett’s stock picks). Billionaire David Shaw’s D.E. Shaw was buying the stock during the third quarter and owned 1.2 million shares (find D.E. Shaw’s favorite stocks). Our database of 13F filings showed that Longview Asset Management, which is managed by James Star, had over $2 billion invested in General Dynamics and it was one of only four stocks present in the filing.
Other defense companies include Lockheed Martin Corporation (NYSE:LMT), Raytheon Company (NYSE:RTN), and Northrop Grumman Corporation (NYSE:NOC). These peers trade between 8 and 10 times their trailing earnings, with analyst expectations generally showing flat earnings over the next two years with the result being that they are in line with General Dynamics on a forward earnings basis. Since their businesses are also exposed to government contracts they would face the same spending cut risk as General Dynamics, and in their most recent quarter each of these companies reported a decline in earnings compared to the same period in the previous year. Raytheon and Northrop Grumman offer similar dividend yields to General Dynamics at 3 to 3.5%, with Lockheed Martin paying a yield of over 5% at current dividend levels.
We would hesitate to take this particular insider purchase as a bullish signal, and there does not seem to be much in particular to recommend General Dynamics relative to its peers other than that. The range of earnings multiples for the industry is quite narrow- though they are low- and from an income perspective we suppose that Lockheed Martin does look attractive. However, any value or income investor would have to satisfy themselves that lower military spending- and not just a one time cut but a permanently lower level of business- would not have too drastic an impact on any chosen investment.
Disclosure: I own no shares of any stocks mentioned in this article.
