Defense Spending And IT Modernization Will Define Future Markets

Key Takeaways

• Record backlog driven by global defense spending and new contracts enhances revenue visibility, especially in Marine, Aerospace, and advanced military programs.
  
• Accelerated investments in cyber defense, digital modernization, and operational efficiency are fueling growth and supporting margin expansion across critical business segments.
  
• Ongoing operational, technology, contract, and financial risks could strain margins and earnings growth across General Dynamics' core defense, aerospace, and technology segments.

Catalysts

Operates as an aerospace and defense company worldwide.

• Robust multi-year order intake and record backlog-driven largely by increased global defense spending and rising geopolitical instability-provide strong visibility into future revenue growth across key segments, especially Marine and Aerospace.
  
• Accelerating investment in secure communications, IT modernization, and cyber defense solutions is fueling growth in the Mission Systems and GDIT divisions, aligning with increased government and enterprise focus on digital transformation and cyber resilience, which should support margin and earnings expansion as these mix shifts take hold.
  
• Expansion of the Electric Boat program and significant new contracts for advanced submarines-supported by higher U.S. Navy funding and industrial base investments-position the Marine Systems segment for sustained sales growth and realization of operating leverage, benefitting both top
• and bottom-line results over the long term.
  
• Strong demand for Gulfstream's new business jet models (G700 and G800) across multiple regions, coupled with improved delivery cadences and a long-term capacity to ramp up production, suggest potential for higher future revenue and gradual margin improvement as learning curves are traversed and product mix shifts towards higher-margin offerings.
  
• The company's focused initiatives on operational excellence, supply chain stabilization, and leveraging digital tools throughout its production system are delivering early improvements in productivity and are likely to drive steady net margin and earnings momentum as scale advantages and efficiency gains continue to compound.

General Dynamics Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming General Dynamics's revenue will grow by 3.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.1% today to 9.1% in 3 years time.
• Analysts expect earnings to reach $5.1 billion (and earnings per share of $19.44) by about July 2028, up from $4.1 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $4.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.6x on those 2028 earnings, down from 20.7x today. This future PE is lower than the current PE for the US Aerospace & Defense industry at 36.0x.
• Analysts expect the number of shares outstanding to decline by 2.1% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.33%, as per the Simply Wall St company report.

General Dynamics Future Earnings Per Share Growth

Risks

• General Dynamics' increasing investment and production in legacy platforms like Gulfstream G400/700/800 and Abrams tanks could expose the company to technology obsolescence risk or customer preference shifts toward more advanced/emerging defense and aerospace solutions, potentially leading to higher R&D/capex needs and margin compression.
  
• Delays and quality issues in the defense supply chain, especially in the Marine segment (e.g., Electric Boat and NASSCO), present ongoing operational risk; while short-term workarounds have been found, sustained supply instability and episodic setbacks (such as floods/rework at NASSCO) could impair throughput, increase costs, and compress net margins.
  
• The Technologies segment, despite strong investments in AI, cyber, and mission software, is susceptible to contract adjudication delays, cancellations, and inconsistent award activity; a slower pace of contract wins or protest challenges may create unpredictable revenue flows and impact earnings growth.
  
• Aerospace services and MRO revenue/margins remain volatile, as demonstrated by recent softness in the service businesses and high sensitivity to quarterly mix and volume. Fluctuations in fleet utilization, new aircraft introductions, or changes in after-market demand could lead to unpredictable margin and profit contributions from this division.
  
• Persistent high net debt ($7.2 billion) and rising interest expenses, in the context of no recent share repurchases and reliance on commercial paper, could reduce financial flexibility, increase vulnerability to changes in interest rates or credit markets, and ultimately weigh on net income and earnings per share.

Valuation

• The analysts have a consensus price target of $335.228 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 $370.0, and the most bearish reporting a price target of just $280.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $55.8 billion, earnings will come to $5.1 billion, and it would be trading on a PE ratio of 20.6x, assuming you use a discount rate of 7.3%.
• Given the current share price of $314.7, the analyst price target of $335.23 is 6.1% 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.