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When we wrote positively about General Dynamics last summer, the stock was trading at a discount to most of its defense and aerospace peers. Happily, the stock since has returned more than 35%, to $198, and it’s still valued below its peers.
“If you applied a defense multiple to General Dynamics’ (GD) defense business, and an aerospace multiple to its aerospace business, you’d arrive at a significantly higher stock,” says UBS analyst David Strauss, who liked the shares a year ago (“General Dynamics Shares Look Too Cheap,” July 30), and still does.

As a result, investors who missed out on the climb could benefit, particularly based on U.S. weapons budget expectations amid last week’s saber rattling from the U.S. and North Korea. Based on White House and congressional defense-spending proposals, “there’s a fair amount of upside to expectations,” says Strauss.

Also, Strauss figures that the Columbia ballistic-missile submarine program that was awarded to General Dynamics this year will generate $12 billion in future cash flow, worth $15 to $20 per share after discounting back to the value of the contract today. Adding that to its Gulfstream aerospace unit’s valuation of $70 to $75 per share based on a 2018 market multiple, Strauss estimates that today’s stock price reflects a roughly 17 times price/earnings multiple on the rest of General Dynamics’ defense business. Its large-cap peers enjoy an average multiple of 21 times 2017 earnings.

General Dynamics will launch the G500, its new business jet, late this year, and the G600 next year. Both should lift profits. Strauss’ base case: the stock can gain at least 13% and possibly as much as 21%, even if defense spending doesn’t rise. As a result, investors who missed out on the climb could benefit, particularly based on U.S. weapons budget expectations amid last week’s saber rattling from the U.S. and North Korea. Based on White House and congressional defense-spending proposals, “there’s a fair amount of upside to expectations,” says Strauss.

Also, Strauss figures that the Columbia ballistic-missile submarine program that was awarded to General Dynamics this year will generate $12 billion in future cash flow, worth $15 to $20 per share after discounting back to the value of the contract today. Adding that to its Gulfstream aerospace unit’s valuation of $70 to $75 per share based on a 2018 market multiple, Strauss estimates that today’s stock price reflects a roughly 17 times price/earnings multiple on the rest of General Dynamics’ defense business. Its large-cap peers enjoy an average multiple of 21 times 2017 earnings.
General Dynamics will launch the G500, its new business jet, late this year, and the G600 next year. Both should lift profits. Strauss’ base case: the stock can gain at least 13% and possibly as much as 21%, even if defense spending doesn’t rise.

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