Aerospace Innovations And Rising Demand Propel Future Growth Amid Challenges

Key Takeaways

• Improved supply chain stability and strong order pipelines position Aerospace for future revenue growth and higher margins.
  
• Robust demand and strong backlogs across segments fuel revenue and margin growth, notably in Combat Systems and Marine Systems.
  
• Supply chain and labor challenges are delaying production, affecting costs and margins, potentially hindering future earnings growth and profitability in multiple segments.

Catalysts

Operates as an aerospace and defense company worldwide.

• The Aerospace segment is expected to benefit from future improvements in supply chain stability, leading to increased production rates and higher margins. This should positively impact revenue and net margins.
  
• The anticipated delivery of more G700 and G800 aircraft, alongside a strong pipeline of orders, positions the company for future revenue growth and improved earnings.
  
• Combat Systems is poised for revenue growth due to strong backlog and robust demand for munitions and combat vehicles, which could also lead to improved margins due to operating leverage.
  
• Marine Systems continues to demonstrate strong growth driven by increased volume on Virginia and Columbia-class submarines, although supply chain improvements are key for further margin enhancement.
  
• The Technologies segment shows potential for steady revenue and earnings growth through a strong backlog and high book-to-bill ratio, which reflects ongoing demand for defense technologies.

General Dynamics Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming General Dynamics's revenue will grow by 5.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.9% today to 9.2% in 3 years time.
• Analysts expect earnings to reach $5.0 billion (and earnings per share of $18.64) by about November 2027, up from $3.6 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.2x on those 2027 earnings, down from 23.7x today. This future PE is lower than the current PE for the US Aerospace & Defense industry at 35.9x.
• Analysts expect the number of shares outstanding to decline by 1.08% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.22%, as per the Simply Wall St company report.

General Dynamics Future Earnings Per Share Growth

Risks

• Supply chain disruptions, particularly affecting the G700 deliveries, have resulted in delayed aircraft deliveries and increased costs, negatively impacting revenue and potentially affecting future earnings growth.
  
• The Marine Systems segment faces ongoing supply chain issues, impacting the delivery schedules and costs related to submarine production, which could lead to stagnant margins and affect overall profitability.
  
• The strong order book and backlog growth may be compromised due to challenges in scaling up production quickly, which might delay revenue recognition and reduce expected net margins.
  
• The Aerospace segment is dealing with the complexities of customized interiors for the G700, which has led to delays and may continue to pressure operating margins until fully resolved.
  
• Marine Systems is struggling with labor and material cost increases, as well as productivity issues that have emerged post-COVID, potentially hindering further margin improvement and impacting the cost structure negatively.

Valuation

• The analysts have a consensus price target of $330.14 for General Dynamics based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $365.0, and the most bearish reporting a price target of just $283.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $53.9 billion, earnings will come to $5.0 billion, and it would be trading on a PE ratio of 21.2x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of $314.03, the analyst's price target of $330.14 is 4.9% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.