Waiting for Takeoff
Justin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
General Dynamics (NYSE: GD) reported fourth quarter results this morning. The $1.68 in EPS was below the consensus estimates of $1.99 as a result of impairments in the Jet Aviation business. The core defense segment continues to perform admirably. For the year, revenues came in at $32.7 billion and EPS at $6.94, both a 1% advance over 2010. Free cash flow (operating cash flow less capex) advanced 6.2% over the year. The stock is off a bit this morning on the release and I maintain that it remains an excellent buy for long-term investors.
General Dynamics is a key military contractor and operates in segments such as tanks, munitions, submarines, military communications, and aerospace via its Gulfstream brand. There is a lot of chatter and uncertainty on the impact of defense “cuts”, but we have to remember that the growth rate will remain positive even if the slope flattens out. With this company you get very stable cash flows, but my favorite part is the upside the Gulfstream brand provides. I think business jets will enter a secular bull market in the next couple of years as the ultra-rich seek to maximize their one limited resource -- TIME.
Valuation and good dividends
The valuation story on this stock remains relatively unchanged despite the advance from the December recommendation. Despite today’s selling pressure, the stock has outperformed the S&P 500 since I recommended it here with a 10.5% total return versus 6.2% for the Index and barely trails the counterpart, Comcast. The price-to-earnings multiple has moved from 9x to 10x, but still remains a bargain. The free cash flow yield remains unchanged at more than 10%.
The company also fits perfectly with those investors seeking to add dividend stocks to their portfolios. The company has what I call good dividends as highlighted by a previous post here. The stock yields 2.6% and the company has grown dividends at a five-year CAGR of 15%. Investors should expect the growth rate in dividends to be maintained or increased with such a high FCF yield and a modest payout ratio of 25%.
The stock trades in-line with peers Lockheed Martin (NYSE: LMT) and Raytheon (NYSE: RTN) despite the extensive upside in the Gulfstream business unit. These stocks, along with General Dynamics, trade with a P/E ratio around 10x and an EV/EBITDA multiple of 6x. As a comparison, peers more exposed to commercial aerospace trade around 14x earnings and 9x EV/EBITDA.
The Bottom Line
General Dynamics reported 4Q 2011 results that were what we expected. Investors in this stock can expect similar results going forward -- steady cash flows and increasing dividends. But with this unique company, investors can get a great secular growth story for next to nothing. The Aerospace unit accounts for just fewer than 20% of sales, but when the secular growth story resumes, that percentage will advance quickly. Once that happens, I would expect multiples to expand beyond the pure play defense names and toward the higher growth commercial aerospace names.
All told, I think GD stock gives investors good dividends, steady earnings growth, and room for modest multiple expansion. That sounds like a winning combination to me.
The Motley Fool owns shares of General Dynamics, Lockheed Martin and Raytheon Company. market8 has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.