This Could Send General Dynamics Stock Soaring
General Dynamics Corporation (NYSE:GD) had another great quarter of earnings results. One of the top defense sector contractors, the company reported a year-over-year increase in earnings, though revenue dropped slightly. General Dynamics stock is trading approximately five percent higher year to date—but it’s also 22% higher as of two years ago, indicating the strength of its bullish trend.
General Dynamics (GD) will benefit from the new “Cold Wars” that seem to be hovering all over the world. The Asia-Pacific region has become a new area of concern, as China translates its economic might into military power. And the fact that Russia has announced some 44% higher spending on military equipment over the next few years will prompt a corresponding increase at the Pentagon. For these reasons, the U.S. military budget will likely increase in the next few years, making General Dynamics stock one of the most attractive anywhere as it will continue to be a major beneficiary of inflated defense budgets and global instability.
General Dynamics, through its Bath Iron Works subsidiary, is one of the top military shipbuilders in the world. Increased military budgets in Russia and China mean the U.S. military will be demanding more tools to patrol the Pacific Ocean. One of the primary tools will be the “DDG 1000” series, the first one of which is the “U.S.S. Zumwalt.”
The U.S.S. Zumwalt is the first of a new class of stealth warships featuring a futuristic design. It is, in fact, the largest U.S. warship—other than aircraft carriers. It is almost as large as the Russian “Kirov” class of nuclear cruisers. The unit cost of the DDG 1000 was $3.8 billion.
General Dynamics oversees the design and construction of the hull, mechanical, and engineering (HM&E) portions of the contract on all DDG 1000s. Despite the vicissitudes of this program and its exorbitant cost, the new U.S. super-destroyers will be undoubtedly very valuable tools. GD is already building two more Zumwalt-class ships, the “Michael Monsoor” (DDG 1001) and the “Lyndon B. Johnson” (DDG 1002) (Source: “US Navy Takes Ownership of Stealth Destroyer Zumwalt,” Defense News, May 20, 2016.)
Indeed, General Dynamics, once known for its “F-16” fighter jets, has shifted away from military aircraft to focus more on naval systems, now a major revenue-generator for the company.
It’s too bad that GD no longer makes the F-16, handing over its production to Lockheed Martin Corporation (NYSE:LMT). On May 26, the United States secured a new customer for its defense wares, including the F-16: Vietnam. (Source: “General Dynamics Profit Tops Estimates on Navy Spending,” Bloomberg, April 27, 2016.)
Washington has lifted the U.S. arms embargo against Vietnam and that country’s air force wants to procure F-16 fighter aircraft. Vietnam is also interested in unmanned aerial vehicles (i.e. drones) for maritime intelligence, surveillance, and reconnaissance (ISR) missions. This is where General Dynamics has a role to play. (Source: “Vietnam May Request F-16s, P-3 Orions From US,” Defense News, May 26, 2016.)
A sale to Vietnam isn’t going to boost GD’s stock price. However, the country’s military awakening reflects an overall rise in defense spending in the entire Asia-Pacific region from Japan to Indonesia, which also recently acquired U.S. hardware. This is going to prompt vast-scale military investments at the Pentagon. Regardless of whether Hillary Clinton or Donald Trump will be making decisions at the Oval Office next, defense spending will increase under the next president’s administration.
The “Gulfstream” jet business is the one potential revenue problem for General Dynamics. Sales of the famous jets have dropped some 16% year-over-year. (Source: “Gulfstream Deliveries Dip 15.6% in First Quarter,” Aviation International News, April 27, 2016.) However, the marine systems division has more than compensated for this shortfall as its revenue rose 10%. (Source: “General Dynamics first-quarter profit beats expectations,” Reuters, April 27, 2016.)
Additionally, China is ramping up its military shipping capacity and this could prompt the U.S. Navy to do more shopping at General Dynamics. The U.S.-China Economic and Security Review Commission has already asked for more ships to counter China’s investments in its naval arsenal. Meanwhile, the cyclical business jet market will pick up soon enough. GD’s Gulfstream already noticed solid sales in Asia, while an apparent economic recovery in Europe should also translate to more orders. (Source: “Report: Chinese Navy’s Fleet Will Outnumber U.S. by 2020,” Defense Tech, December 3, 2014.)
Ultimately, the rising tide of militarism in many parts of the world, particularly in the Asia-Pacific basin, is going to be profitable for the defense sector. The focus on this region is especially good for General Dynamics stock, because the nature of the international tensions will generate more demand for the naval-based weapon systems it develops.
General Dynamics is one of those stocks you could buy and not have to babysit every day. Indeed, no matter who occupies the White House next year, defense spending is only going to increase and GD stock is set to be a prime beneficiary.
Does GD stock have triple-digit upside potential? It’s certainly possible.