General Dynamics' Backlog Rises Despite Tight Budget
On Dec 1, 2014, we issued an updated research report on the defense contractor General Dynamics Corp. (GD). This Zacks Rank #2 (Buy) stock reported a positive 7.33% earnings surprise in the last quarter.
The company posted a 4.91% average positive earnings surprise over the last four quarters. General Dynamics’ third-quarter earnings were well supported by its cost control efforts, higher backlog and strong financials, helping it to beat the Street estimates.
The company is one of the two contractors equipped to build nuclear-powered submarines in the U.S. with the other being Huntington Ingalls Industries (HII). The maker of Gulfstream jets, tanks as well as U.S. Navy ships lifted its 2014 earnings per share guidance to $7.60–$7.70 from $7.40–$7.45 anticipating better margins, a lower tax rate and continued share buybacks.
Jet sales at the Gulfstream business continue to see traction. The G650 large-cabin business jet is in high demand, with orders booked for the next five years. Gulfstream is expected to contribute more significantly to General Dynamics’ earnings going forward.
The commercial aviation market is poised for exponential growth riding on mounting worldwide passenger traffic. This in turn will offer encouraging prospects to General Dynamics. The company expects the segment’s revenue to increase approximately 8% in 2014 as a result of increased deliveries of Gulfstream aircraft.
A rising backlog helps the company to safeguard its revenue stream. Total backlog at the end of the third quarter 2014 stood at $74,433 million, an increase of 55.7% year over year, primarily due to higher backlogs at Combat Systems and Marine Systems.
That said, General Dynamics’ Information Systems & Technology (“IS&T”) segment will likely continue to experience top-line pressure resulting from ongoing defense sequestration and margin compression, as the spending dwindles on key production programs in the mobile communication system. The company expects 2014 revenues from IS&T to decline roughly 12% primarily due to a reduction in defense spending on major programs.
Zacks Rank
General Dynamics Holds a Zacks Rank #2 (Buy). Some other well-ranked stocks in the aerospace and defense industry include Engility Holdings, Inc. (EGL) and The Boeing Co. (BA), both with a Zacks Rank #2.
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