Demand For Gulfstream Aircraft And Submarine Programs Will Strengthen Future Operations

Key Takeaways

• Strong demand in the Aerospace segment and backlog in Combat Systems drive expected revenue and earnings growth.
  
• Significant contract funding and order activity support revenue and margin improvements amid supply chain challenges.
  
• Supply chain disruptions and cost challenges, particularly in Aerospace and Marine Systems, are impacting revenues, margins, cash flow, and overall financial flexibility.

Catalysts

Operates as an aerospace and defense company worldwide.

• The Aerospace segment is expecting to see a significant boost in revenue due to strong demand for Gulfstream aircraft, with growth coming from increased deliveries, particularly of the G700 and the new G800. This improvement is expected to drive higher revenue and earnings in 2025.
  
• Combat Systems aims to leverage its large backlog and strong order intake, specifically in munitions and international vehicle programs, which is expected to contribute to future revenue growth and margin improvement.
  
• Marine Systems is poised for a continued revenue climb, supported by substantial contract funding for Columbia class and Virginia class submarine programs. This should help mitigate supply chain issues and inflation costs, contributing to planned revenue growth and improved operating margins in 2025.
  
• Technologies segment is benefiting from strong order activity and record award levels, positioning it for continued growth in revenue and earnings when Mission Systems completes its transition to new programs.
  
• Increasing shareholder returns through share repurchases and dividends, coupled with strong free cash flow generation, indicates potential for EPS growth as cash is returned to shareholders, enhancing shareholder value.

General Dynamics Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming General Dynamics's revenue will grow by 5.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.9% today to 9.1% in 3 years time.
• Analysts expect earnings to reach $4.9 billion (and earnings per share of $18.44) by about January 2028, 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 19.9x on those 2028 earnings, up from 19.8x today. This future PE is lower than the current PE for the US Aerospace & Defense industry at 34.0x.
• Analysts expect the number of shares outstanding to decline by 1.24% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.41%, as per the Simply Wall St company report.

General Dynamics Future Earnings Per Share Growth

Risks

• Supply chain disruptions and supplier quality issues, particularly related to the G700 aircraft, have led to increased costs and delays, impacting revenue and margins in the Aerospace segment.
  
• High inflation and demographic challenges in the Marine Systems segment have led to increased costs and potentially lower net margins, as existing contracts did not fully account for such rapid cost increases.
  
• Delays and quality issues within the submarine supply chain have led to increased costs in the Marine Systems segment, negatively affecting operating earnings and net margins in this area.
  
• Working capital remains elevated due to delayed deliveries and material purchases on undefinitized contracts, which can impact the company's cash flow and financial flexibility.
  
• Mission Systems is undergoing a transition with revenue expected to be slightly down, indicating potential challenges in maintaining revenue growth and margin expansion until new programs are fully operational.

Valuation

• The analysts have a consensus price target of $304.7 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 $360.0, and the most bearish reporting a price target of just $241.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $53.4 billion, earnings will come to $4.9 billion, and it would be trading on a PE ratio of 19.9x, assuming you use a discount rate of 6.4%.
  
• Given the current share price of $262.57, the analyst's price target of $304.7 is 13.8% higher.
  
• 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.