General Dynamics shares: Buy or sell?

  @FortuneMagazine April 11, 2013: 7:04 AM ET
FAC29 general dynamics

Peter Arment, Sterne Agee (left) and Brian Ruttenbur, CRT Capital Group

(Fortune)

Will General dynamics shares fall as federal budget cuts eat into defense spending? A bull and a bear face off.

The bull: Peter Arment, analyst, Sterne Agee

General Dynamics (GD, Fortune 500) is going to feel the pressure from the drawdown of forces abroad, as most defense companies will. But it's the only large one with a sizable consumer operation. Gulfstream, the private jet company, accounts for 30% of the company's profits. The newest plane, the G650, an ultra-high-end business jet, is going to be the most profitable in GD's history once it's ramped up. It has a sold-out backlog through 2017. This will keep cash flow high. Historically, when the Gulfstream business does well, the stock commands a premium price/earnings multiple compared with its peers. Right now it's in line with the sector, at a forward P/E of 9.5. We think that should be closer to 12.5. Shares are trading at $70, but we see them jumping to $82.

The bear: Brian Ruttenbur, analyst, CRT Capital Group

The company 's exposure to the Army -- 40% of its revenue -- is my biggest concern. As the Department of Defense goes, so does General Dynamics. With $55 billion of sequestration cuts coming from the DoD, the company's projected 2013 sales are falling 12.6% from last year, and 2014's budget could force even more cutbacks. Right now GD is trading higher than its 2009 levels, when the U.S. Army still had near-full troop levels in Afghanistan and Iraq. It should be trading closer to those 2009 levels, at 7.5 times earnings. We think the share price is inflated because of buybacks and dividends. Its Gulfstream business is strong, but at only 20% of overall sales, it's not enough to bolster against the Army cutbacks. We see a price closer to $54.

This story is from the April 29, 2013 issue of Fortune. To top of page



Join the Conversation
Markets
Sponsored by
Index Last Change % Change
Dow 16,408.54 -16.31 -0.10%
Nasdaq 4,095.52 9.29 0.23%
S&P 500 1,864.85 2.54 0.14%
Treasuries 2.72 0.08 3.19%
Data as of 6:06pm ET
Company Price Change % Change
Bank of America Corp... 16.15 0.00 0.00%
Facebook Inc 58.94 0.00 0.00%
General Electric Co 26.56 0.00 0.00%
Cisco Systems Inc 23.19 -0.02 -0.09%
Micron Technology In... 23.91 0.00 0.00%
Data as of Apr 17
Overnight Avg Rate Latest Change Last Week
30 yr fixed4.36%4.24%
15 yr fixed3.39%3.26%
5/1 ARM3.36%3.27%
30 yr refi4.34%4.22%
15 yr refi3.38%3.24%
View rates in your area
 
Find personalized rates:
Rate data provided
by Bankrate.com
Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.