We came across a bullish thesis on General Dynamics Corporation (GD) on ValueInvestorsClub by jagger. In this article we will summarize the bulls’ thesis on GD. General Dynamics Corporation shares were trading at $288.22 when this thesis was published, vs. closing price of $302.4 as of Sept 10.
Photo by General Dynamics, a prominent global aerospace and defense company with an $80 billion market cap and $89 billion enterprise value, stands out with its diverse and leading market franchises. Founded in 1952 and headquartered in Reston, VA, the company operates worldwide and is renowned for its strong business and M&A track record. With 2023 revenues of $42.3 billion, net income of $3.3 billion, and free cash flow (FCF) of $3.8 billion, GD maintains a solid financial foundation with a leverage ratio of approximately 1.5x net debt to EBITDA.
The investment thesis for General Dynamics centers on three pivotal aspects. Firstly, the strength of its Gulfstream business is a significant asset. Gulfstream’s robust product portfolio, healthy backlog of $21 billion, and recent new model introductions position it as a leader in the business jet market. The G700, G800, and G400 jets, with FAA certification and initial deliveries underway, are expected to boost profitability despite earlier margin concerns. The business jet market remains resilient, with Gulfstream well-positioned to capitalize on continued demand.
Secondly, GD’s defense business aligns closely with Department of Defense (DoD) priorities, addressing critical areas such as munitions replenishment, naval capabilities, and cyber threats. The Marine Systems unit, with a $44 billion backlog, is poised for long-term growth due to increased investment needs in U.S. Navy shipbuilding. Combat Systems and Technologies also present attractive opportunities, supported by a combined backlog of $58 billion. The company’s defense offerings are well-positioned to benefit from ongoing geopolitical tensions and rising defense budgets.
Lastly, GD’s capital deployment strategy enhances EPS growth. With FCF conversion exceeding 100% in recent years, GD is well-positioned for continued high single-digit dividend increases and substantial share repurchases. The company’s recent repurchase of 390,000 shares demonstrates its commitment to returning capital to shareholders. Over the past decade, GD has repurchased an average of 3.5% of shares annually, indicating a strong focus on shareholder value.
General Dynamics operates across four main segments: Aerospace, Marine Systems, Combat Systems, and Technologies. Its diversified portfolio includes leading products and services in business aviation, shipbuilding, land combat vehicles, and advanced technology solutions. The company’s valuation appears reasonable, trading at a 14x EBITDA multiple, 18x earnings, and a 5.6% FCF yield. With expected EPS growth in the low to mid-teens and favorable industry tailwinds, GD is positioned for steady long-term growth. Despite some risks, including supply chain challenges and potential macroeconomic downturns, GD’s solid fundamentals and strategic focus make it a compelling investment opportunity.
General Dynamics Corporation is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 48 hedge fund portfolios held GD at the end of the second quarter which was 54 in the previous quarter. While we acknowledge the potential of GD as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as 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.