General Dynamics Corporation (GD) continues to benefit from strong defense outlays. Revenue growth, margin expansion, growing backlog, an under-leveraged balance sheet, an ongoing share purchase program, and strong cash flow generation are the driving factors.
Also strong demand for its Gulfstream jets, especially G650, will boost the Gulfstream order-book. Increased Navy spending on Virginia class submarines and Zumwalt class destroyers boosted the Marine segment. Management believes that there is ample near-term upside potential for the Combat Systems segment due to Abrams tank modernization and Stryker production. General Dynamics also expects a boost in earnings at the IS&T segment despite a steady ramp-down of the Bowman program due to expansion of customer base through acquisitions.
Accordingly, we maintain a BUY recommendation on GD with a six-month target price of $69.50. Price appreciation to our near-term valuation target, coupled with a secure $0.35 per share quarterly dividend represents annualized total return potential of 32.7%.
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