General Dynamics Stock is at Record Highs but There Could Be Plenty of Upside
General Dynamics Corporation (NYSE:GD) is trading at record high. GD stock hit over $156.00 per share on September 28.
The catalyst may have been the fact that General Dynamics won the contract to manage the 2020 Census Questionnaire Assistance (CQA) program for the U.S. Census Bureau, worth some $430.0 million spread over a five-year period.
But that’s merely the proverbial tip of a much larger iceberg of contracts. No wonder Citigroup Inc (NYSE:C) has set a $185.00 price target for GD stock this year.
More than the actual dollar amount, the most surprising aspect of the Census Bureau contract is the flexibility of General Dynamics stock. The company has reached such levels of diversification that winning a tender to supply customer service management, personnel recruitment, technology, and running a multilingual contact facility would offer such upside for GD stock. (Source: “General Dynamics’ (GD) Unit Wins $430M U.S. Census Deal,” NASDAQ, September 26, 2016.)
These are hardly the core activities that General Dynamics pursues. But, not to worry, the company is still in the business of making military aircraft, ships, and rockets. GD stock will have plenty of revenue and earnings to sustain its decidedly bullish course over the next few years. Just as GD got news of the above-noted CQA contract, the U.S. Air Force issued a no-bid contract for $1.6 billion for 10 new modified “Gulfstream” jets to serve “Compass Call” duty. (Source: “Air Force Seeks No-Bid Contract for General Dynamics’ Gulfstream Jet,” 24/7 Wall Street, September 28, 2016.)
General Dynamics Remains One of the Top Pentagon Contractors
The U.S. Air Force will also be ordering replacements for the Joint Surveillance and Target Attack Radar System (JSTARS) aircraft. General Dynamics is competing against Lockheed Martin Corporation (NYSE:LMT), Boeing Co (NYSE:BA), and Bombardier, Inc. (TSX:BBD.B) for that contract, which promises to be as lucrative as the Compass Call one. Congress may not be amused, complaining that no-bid contracts serve the taxpayer badly, but GD stockholders should be rather pleased.
General Dynamics wins new contracts on a weekly basis. The big ones are those likely to move the stock. In the uncertain global situation, with various countries vying to become—or restore their roles as—military superpowers, the one guarantee is that arms manufacturers, including the large U.S. military contractors, will enjoy plenty of business and financial growth.
During the September 26 presidential debate, candidates Hillary Clinton and Donald Trump accused each other of not having an adequate plan to defeat ISIS. Regardless of who wins in November, the next resident of the White House will inherit a number of lingering global security problems. She or he will also inherit a legacy of defense sector cuts over the past four years.
General Dynamics Should Benefit from a New “Cold War”
Russia has used Syria as a battleground to show off its rather formidable arsenal. Meanwhile, American and Russian foreign policies have never clashed to the current extent as they did in harshest periods of the Cold War. Inevitably, there will be considerable pressure from the Pentagon to boost defense spending.
General Dynamics is poised to be on the receiving end of many of those billions of dollars.
The era of nuclear submarines and battleships has hardly come to a close. As for the defense budget itself, President Barack Obama may have overseen its slight shrinkage. But the point of the defense budget is that there is still quite a large one—$582.0 billion—proposed for 2017. Sea vessels are all the rage, and General Dynamics has some major cards to play in this area.
GD makes attack submarines, and it’s one of two contractors worldwide that can actually design and build a nuclear-powered submarine. General Dynamics’ “Marine Systems” unit expects a significant increase in business, forecasting revenues of $100.0 million to $200.0 million by the end of this year. (Source: “General Dynamics’ Electric Boat Wins $105M U.S. Navy Deal,” NASDAQ, September 23, 2016.)
As for that overall defense spending budget, some $8.1 billion are to be spent on submarines. That automatically means a growth spurt for General Dynamics. Then there is the “DDG 1000” series of stealth battleships, of which the USS Zumwalt is the first example, at a unitary cost of $3.8 billion. The change of leadership in Washington should not alter the budgets, and GD stock can literally count on the above-mentioned contracts either continuing or materializing. Therefore, the prospects for General Dynamics stock are decidedly bullish.