General Dynamics Earnings: Steady Performance and Room to Grow; Fair Value Estimate Up 2%

General Dynamics GD reported very solid third-quarter results. The company showed some accelerated growth in its defense businesses and some small fluctuations in operating margins, though these remain healthy across the board. We have raised our fair value estimate to $252 per share from $247. This increase is in part due to the time value of money and reining in our long-term capital expenditure forecast. Capital expenditures have returned to historical levels around 2% of sales after a raft of investments in submarine and business jet capacity.

Wide-moat General Dynamics is an extraordinarily well-run and financially disciplined company. We give the team credit for delivering double-digit margins in business lines where competitors sometimes struggle to maintain even high-single-digit operating margins. Thus, our confidence is high that General Dynamics will ultimately return to previous and higher levels of segment operating margins, and we have maintained these forecasts in our model.

Depending on whether the Federal Aviation Administration certifies Gulfstream’s new G700 jet this year, the company aims to deliver 19 of the mostly finished planes to customers and book revenue in the fourth quarter. We model the sales slipping into 2024, in case FAA certification takes longer. That makes only a few cents’ difference to our fair value estimate, so we consider this scenario to be immaterial.