General Dynamics Profiting from Navy Spending
General Dynamics Corporation (NYSE:GD) presented its first-quarter 2016 results on Wednesday, April 27. Given an overall surge in demand for military hardware, it’s no surprise that General Dynamics stock responded favorably to the $717 million ($2.30 per share) earnings, which beat last year’s record of $716 million ($2.14 per share). General Dynamics stock was trading at the highest level of the year.
While General Dynamics’ revenue dropped 0.8% to $ 7.72 billion, it still beat the expected earnings per share (EPS) of $2.16 on revenue of $7.70 billion. Still, General Dynamics stock could top its all-time record-high, which it hit last summer, in the next few weeks. Though the company has gradually moved away from aerospace, as rival defense contractor Lockheed Martin took over production of the “F-16,” the higher-than-expected results came thanks to an especially good quarter for its marine systems division. (Source: “General Dynamics Profit Tops Estimates on Navy Spending,” Bloomberg, April 27, 2016.)
General Dynamics did not perform as strongly in its aerospace sector, as demand for its “Gulfstream” business jets dropped some 16% year-over-year (Source: “Gulfstream Deliveries Dip 15.6% in First Quarter,” AINOnline, April 27, 2016.)
The good news here is that for GD shareholders, while Gulfstream sales have lost some altitude in the first quarter of 2016, they have seen a strong comeback in April. The reported rise in the inventory of used “G650s,” the top model (capable of reaching speeds just below the speed of sound with a range of well over 8,000 miles), has not hurt demand for new ones. (Source: Ibid.)
Still, General Dynamics is, now more than ever, a maker of ships and submarines. That’s where investors should focus their attention. As it happens, both naval craft are experiencing a surge in demand worldwide. Whereas General Dynamics suffered a 5.7% decrease in revenue from aerospace, its marine systems division gained 10.0% thanks to contracts from the U.S. Navy. (Source: “General Dynamics first-quarter profit beats expectations,” Reuters, April 27, 2016.)
In 2017, the U.S. Navy intends to upgrade several submarines as its research and development (R&D) budget also increases in this sector. The Navy wants a new submarine to be equipped with intercontinental ballistic missiles with nuclear warheads to replace the Ohio-class strategic submarines. General Dynamics is one of the main contractors to benefit from the program.
Heavy military spending in Russia and China and an order for some $40.0 billion in submarines from France for the Australian Navy will drive this market over the next decade and will keep General Dynamics stock buoyant for years to come.
Indeed, China intends to build up its military fleet to a total 351 ships by 2020. China wants an ever-greater capability to strike targets worldwide in a quest to boost its role from regional to global military power. In 2014, the U.S.-China Economic and Security Review Commission urged Congress to approve more spending for the U.S. Navy, adding new ships to counter China’s growing ambitions in the Pacific region. The commission wants Congress to dispense funds to build 67 ships. (Source: Report: “Chinese Navy’s Fleet Will Outnumber U.S. by 2020,” Defense Tech, December 3, 2014.)
Rising military tensions with Russia and China and a growing U.S. military budget are good news for General Dynamics stock. While the overall global outlook points to multiple sources of conflicts with emerging powers posturing for supremacy, leading U.S. Republican presidential candidate Donald Trump has hinted that he would spend considerably to upgrade U.S. military systems, including nuclear arsenal, which relies on the kind of naval equipment that General Dynamics makes. So, it would appear there are plenty of dollars to be made in this industry.
Like other defense stocks, General Dynamics is a “set it and forget it” kind of pick. And simply put, the future looks stable and full of opportunity for GD stock.