General Dynamics Q3: Aerospace Shines, Defense Uncertainties

General Dynamics’ (GD) Q3 results demonstrated the benefits of the group’s exposure to commercial aerospace through Gulfstream, while defence-related divisions are positioning themselves for the long term while maintaining short-term capability. GD has been making small acquisitions even ahead of clarity on sequestration, as management has taken the opportunity to strengthen the group for the long term while picking up assets at a competitive price. With entry into service of the Gulfstream G650 scheduled within the next few weeks, Aerospace continues to be the bright spot, while the defence businesses are focused on operational performance, right sizing and international opportunities.

Q3 results – Aerospace shines, defence uncertainties
GD’s Q3 results highlighted the divergence in outlook across the group’s divisions. Aerospace had a successful quarter, with sales up 30% and further progress anticipated in Q4. Defence-related divisions, particularly combat systems and IS&T, stalled while orders were delayed and uncertainty pervades throughout the industry. The group’s focus in Q4 is centred on delivering the new G280 and G650 business jet programmes, while remaining agile to the impact of sequestration elsewhere.

Focus in defence on sustaining operational capability
With a continuing resolution and the forthcoming US fiscal cliff, the main focus of GD‘s defence divisions is to maintain operational capability while positioning for long-term opportunities in international markets and areas of long-term resilience. This was supported by orders including engineering development for the Abrams main battle tank modernisation programme, increasing marine repair exposure through the acquisitions of Metro Machine and Earl Industries and further network modernisation development programmes through JTRS and WIN-T awards.

Valuation: Defence hurting rating but increasing Aerospace
Given GD’s c 80% exposure to defence, we are not surprised by the current multiple of 9.1x CY13 EPS. But with growing Aerospace revenues and developing international bids, there is still an opportunity for re-rating as clarity on the exact direction of defence spend begins over the next six to nine months.

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