Company Reports

General Dynamics reported first-quarter 2024 results, which included slippage of any G700 business jet revenue into later quarters because of the timing of Federal Aviation Administration certification of the plane. We did not alter our full-year forecast as we have every confidence the company will deliver the planes this year. In fact, we raised our fair value estimate to $300 per share from $260 entirely based on our conviction in this wide-moat firm's discipline and ability to reinvest for success year over year. We raised our estimate of the company's midcycle earnings growth to 6.5% from 4.5% and upped the quotient of those earnings we think the company can successfully compound internally to 22% from 17.5%, giving it a few years of historically consistent returns on capital before our model assumes competition will eventually erode economic profits 20 years hence.

Regulated margins, mature markets, customer-paid research and development, and long-term revenue visibility allow defense contractors to deliver a lot of cash to shareholders, which we view positively because we don’t see substantial growth in this industry. Indeed, defense budgets usually ebb and flow with a nation's wealth and its perception of danger. In the US, both have been on the rise, and among many allies, notably Germany and Japan, geopolitics is leading to larger military budgets than we've seen for decades. For perspective, we estimate that the portions of the US defense budget relevant to contractors like General Dynamics and its competitors and subcontractors shrank between 2012 and 2017 by 2.6% annualized while these budgets grew between 2018 and 2023 by 6.5% annualized. We think the contractors' budget will continue to grow with modernization, but more moderately, averaging around 2.5%-3.0% over the next five years.

We are reviewing President Joe Biden's fiscal 2025 defense budget request, released March 11, which is limited by a compromise struck in mid-2023 to avoid government shutdown at only a 1% increase over the 2024 sum.

General Dynamics reported year-end results for 2023 that came in a bit shy of our expectations, but we expect the business will make up for it in 2024. We have increased our fair value estimate to $260 from $252.

Regulated margins, mature markets, customer-paid research and development, and long-term revenue visibility allow defense contractors to deliver a lot of cash to shareholders, which we view positively because we don’t see substantial growth in this industry. Indeed, defense budgets usually ebb and flow with a nation's wealth and its perception of danger. In the U.S., both have been on the rise, and among many allies, notably Germany and Japan, geopolitics is leading to larger military budgets than we've seen for decades. For perspective, we estimate that the portions of the U.S. defense budget relevant to contractors like General Dynamics and its competitors and subcontractors shrank between 2012 and 2017 by 2.6% annualized while these budgets grew between 2018 and 2023 by 6.5% annualized. We think the contractors' budget will continue to grow with modernization, but more moderately, averaging around 2.5%-3.0% over the next five years.

Regulated margins, mature markets, customer-paid research and development, and long-term revenue visibility allow the defense contractors to deliver a lot of cash to shareholders, which we view positively because we don’t see substantial growth in this industry. Indeed, defense budgets usually ebb and flow with a nation's wealth and its perception of danger. In the U.S., both have been on the rise, and among many allies, notably Germany and Japan, geopolitics is leading to larger military budgets than we've seen for decades. For perspective, we estimate that the portions of the U.S. defense budget relevant to contractors like General Dynamics and its competitors and subcontractors shrank between 2011 and 2016 by 3.7% annualized while these budgets grew between 2016 and 2021 by 6.5% annualized. We think the contracting budget will continue to grow with modernization, but more moderately, averaging around 2.5%-3.0% over the next five years.

Regulated margins, mature markets, customer-paid research and development, and long-term revenue visibility allow the defense contractors to deliver a lot of cash to shareholders, which we view positively because we don’t see substantial growth in this industry. Indeed, defense budgets usually ebb and flow with a nation's wealth and its perception of danger. In the U.S., both have been on the rise, and among many allies, notably Germany and Japan, geopolitics is leading to larger military budgets than we've seen for decades. For perspective, we estimate that the portions of the U.S. defense budget relevant to contractors like General Dynamics and its competitors and subcontractors shrank between 2011 and 2016 by 3.7% annualized while these budgets grew between 2016 and 2021 by 6.5% annualized. We think the contracting budget will continue to grow with modernization, but more moderately, averaging around 2.5%-3.0% over the next five years.

General Dynamics 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.

Regulated margins, mature markets, customer-paid research and development, and long-term revenue visibility allow the defense contractors to deliver a lot of cash to shareholders, which we view positively because we don’t see substantial growth in this industry. Indeed, defense budgets usually ebb and flow with a nation's wealth and its perception of danger. In the U.S., both have been on the rise, and among many allies, notably Germany and Japan, geopolitics is leading to larger military budgets than we've seen for decades. For perspective, we estimate that the portions of the U.S. defense budget relevant to contractors like General Dynamics and its competitors and subcontractors shrank between 2011 and 2016 by 3.7% annualized while these budgets grew between 2016 and 2021 by 6.5% annualized. We think the contracting budget will continue to grow with modernization, but more moderately, averaging around 2.5%-3.0% over the next five years.

We see Oct. 9, 2023's sudden price increase in defense stocks as an overblown and simplistic reaction to the outbreak of war in Israel and Gaza. As we have pointed out before, the dots between military combat and the profit of a defense contractor do not connect nearly as directly as they seem to in the investing public's imagination. We will not alter our ratings or valuations of defense contractors in light of this news, and we believe long term development and resupply of missile defense technology are already baked sufficiently into our forecasts.

General Dynamics reported second-quarter results that slightly exceeded FactSet consensus revenue and earnings expectations. Especially strong revenue growth was offset in the quarter by dips in operating margins across the board, mostly due to lingering supply chain issues that management warned of earlier this year, citing supply chain issues hitting Gulfstream and its marine systems divisions as well as the timing of other contracts. The company's supply chain issues remain most acute in aerospace (where planes all but complete are awaiting scarce parts) and marine, where the supply chain is unusually long and specialized.

Regulated margins, mature markets, customer-paid research and development, and long-term revenue visibility allow the defense contractors to deliver a lot of cash to shareholders, which we view positively because we don’t see substantial growth in this industry. Indeed, defense budgets usually ebb and flow with a nation's wealth and its perception of danger. In the U.S., both have been on the rise, and among many allies, notably Germany and Japan, geopolitics is leading to larger military budgets than we've seen for decades. For perspective, we estimate that the portions of the U.S. defense budget relevant to contractors like General Dynamics and its competitors and subcontractors shrank between 2011 and 2016 by 3.7% annualized while these budgets grew between 2016 and 2021 by 6.5% annualized. We think the contracting budget will continue to grow with modernization, but more moderately, averaging around 2.5%-3.0% over the next five years.

General Dynamics reported quarterly results that slightly exceeded Wall Street's overall revenue and earnings expectations, but a sudden decrease in operating margin, especially at Gulfstream, coupled with management's description of this and next quarter's results as "aberrant" due mostly to supply chain issues that won't likely resolve until the third quarter, disappointed investors.

Regulated margins, mature markets, customer-paid research and development, and long-term revenue visibility allow the defense contractors to deliver a lot of cash to shareholders, which we view positively because we don’t see substantial growth in this industry. Indeed, defense budgets usually ebb and flow with a nation's wealth and its perception of danger. In the U.S., both have been on the rise, and among many allies, notably Germany and Japan, geopolitics is leading to larger military budgets than we've seen for decades. For perspective, we estimate that the portions of the U.S. defense budget relevant to contractors like General Dynamics and its competitors and subcontractors shrank between 2011 and 2016 by 3.7% annualized while these budgets grew between 2016 and 2021 by 6.5% annualized. We think the contracting budget will continue to grow with modernization, but more moderately, averaging around 2.5%-3.0% over the next five years.

After reviewing General Dynamics' recent results and our assumptions, we have increased our fair value estimate to $237 from $226, as we forecast the company's sizable investments in new aircraft, submarine programs, and even its IT services business bearing fruit in the form of new revenue and higher long-term profitability.

Regulated margins, mature markets, customer-paid research and development, and long-term revenue visibility allow the defense contractors to deliver a lot of cash to shareholders, which we view positively because we don’t see substantial growth in this industry. Indeed, defense budgets usually ebb and flow with a nation's wealth and its perception of danger. In the U.S., both have been on the rise, and among many allies, notably Germany and Japan, geopolitics is leading to larger military budgets than we've seen for decades. For perspective, we estimate that the portions of the U.S. defense budget relevant to contractors like General Dynamics and its competitors and subcontractors shrank between 2011 and 2016 by 3.7% annualized while these budgets grew between 2016 and 2021 by 6.5% annualized. We think the contracting budget will continue to grow with modernization, but more moderately, averaging around 2.5%-3.0% over the next five years.

About three-fourths of General Dynamics is a defense prime contractor and the other fourth a business jet manufacturer. Defense primes rely on defense spending for revenue, and we favor companies with tangible growth profiles through a steady stream of contract wins, ideally to contracts that are fulfilled over decades. General Dynamic’s crown jewel of long-cycle contracts, the Columbia-class submarine, exemplifies this with planned procurement through 2042. Regulated margins, mature markets, customer-paid research and development, and long-term revenue visibility allow the defense primes to deliver a lot of cash to shareholders, which we view positively because we don’t see substantial growth in this industry.

Wide-moat-rated General Dynamics delivered solid fourth-quarter results, driven by strength in its combat systems and aerospace segments. For the full year, it posted sales of $39.4 billion (up 2% year over year) and generated a segment operating margin of 10.7% (down 10 basis points). Management issued 2023 sales guidance that fell short of our forecast due to ongoing supply bottlenecks for defense programs. The company’s expectations for mid-single-digit top-line growth and modest margin expansion are driven by an expected uptick in commercial aircraft deliveries.

About three-fourths of General Dynamics is a defense prime contractor and the other fourth a business jet manufacturer. Defense primes rely on defense spending for revenue, and we favor companies with tangible growth profiles through a steady stream of contract wins, ideally to contracts that are fulfilled over decades. General Dynamic’s crown jewel of long-cycle contracts, the Columbia-class submarine, exemplifies this with planned procurement through 2042. Regulated margins, mature markets, customer-paid research and development, and long-term revenue visibility allow the defense primes to deliver a lot of cash to shareholders, which we view positively because we don’t see substantial growth in this industry.

Wide-moat-rated General Dynamics delivered solid third-quarter results, driven by a continued recovery in jet deliveries and positive tailwinds in the marine segment. Sales of $10 billion and adjusted EPS of $3.26 outpaced FactSet consensus by 1% and 3.5%, respectively. Management reaffirmed its 2022 guidance in the quarter as a continued recovery in aerospace demand and a volatile geopolitical outlook stoked robust order activity.