GD - General Dynamics

[samthefirefly]

"General Dynamics is a long-cycle defense contractor and business jet manufacturer. The firm’s segments include aerospace, combat systems, marine, information technology, and mission systems. The company’s aerospace segment creates Gulfstream business jets. Combat systems mostly produces land-based combat vehicles, such as the M1 Abrams tank. The marine subsegment creates nuclear-powered submarines, among other things. The information technology business primarily serves the government market. The mission systems segment focuses on products that provide command, control, computers, intelligence, surveillance, and reconnaissance capabilities to the military."

 

- 10-Yr Median Returns: ROA 7.7%, ROE 22.4%, ROIC 18.8%

- Average cash flow/revenue over the past handful of years is about 7%

- Average net margin over the past five years is high single digits

- High barriers to entry, secured revenue through long-term contracts.

- Considered a dividend aristocrat (current yield is 3%)

- Very efficient, Fixed Asset Turnover above 8 and Total Asset Turnover above 0.8

- Quick ratio 0.84, current ratio 1.29, debt/equity 1.01, interest coverage 8.86

 

The commercial aviation segment is only 25% of GD's business

 

From VSG DD:

"The US government is their main customer, but it’s not their only customer. 66% of revenue is derived from the US government, 9% from foreign governments (they produce the British army’s AJAX armored fighting vehicle, for instance), and 25% is from their commercial aviation business (Gulfstream jets).

 

The commercial aviation segment (Gulfstream aerospace – which they purchased in the late ‘90s) is the cyclical part of the business, but it is only 25% of revenue. The cyclicality of that industry isn’t something that can sink the rest of the company. If this was the sole focus of General Dynamics, this would be a terrible business to own due to its cyclicality. With that said, when times are good, it’s a fine business to own with decent profit margins (operating margins were 17.6% in 2018 and 15.6% in 2019). Another nice aspect to this business is that the contracts to build the aircraft are often locked in, so the revenue doesn’t disappear overnight during a recession."

 

Lastly, valuation is cheaper than its historical average (5-year)

 

- P/S 1.12 (current), 1.57 five-year average

- P/E 13.43 (current), 16.73 five-year average

- P/B 2.89 (current), 4.33 five-year average

 

There is some fascinating info about their stability, moat, and risks. Leaving research from people with more experience than me:

 

ValueStockGeek DD: https://valuestockgeek.com/2020/10/12/general-dynamics-gd/