Aviation manufacturer and defense contractor General Dynamics (GD) appears to be on a slow growth path with few prospects to increase that rate of growth. The company also faces several macro factors which could result in a steep decline in revenues and profits. As a result, even a low P/E ratio does not make General Dynamics a value stock.
GD operates in four business lines. The aviation or aerospace division manufactures the well know Gulfstream line of business jets. The combat systems, marine systems, and information technology systems business groups provide products and services primarily for the U.S. military and Homeland Security.
The breakdown of business groups using sales for the first half of 2011 has information systems generating 36 percent of revenues; combat systems 26 percent; marine systems 21 percent; and aerospace 17 percent. Combat systems and IT are about even in operating earnings contributions and have provided a combined 61 percent of those earnings. However, combat systems earnings are on the rise and information systems technology earnings have been dropping.
The second quarter financial results saw a 5 percent year-over-year increase in earnings per share to $1.76. However, the bulk of the increase was due to a 4 percent decrease in shares outstanding. Quarterly revenues declined by 3 percent to $7.88 billion.
Growth through acquisition
The path for growth at General Dynamics appears to be acquiring other businesses in its areas of focus. In July, GD purchased battlefield communications company Fortress Technologies for an undisclosed amount. General Dynamics currently has approximately 2.5 billion in cash, so it has the ability to buy acquisition targets outright.
Military spending is expected to be flat or declining for the next decade. Positive events for shareholders could be continued share buybacks or an increase in the dividend payment. A negative outcome would be slowly declining revenue as the military spending pie gets smaller. The company reports next on October 27.
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