As requested by our member, Raj - posting the full analysis here.

LINK TO DCF MODEL

Overview

General Dynamics (GD) is a defense contractor and aerospace company. The company operates four business groups:  Aerospace, Marine Systems, Combat Systems and Technologies.

Key Catalysts

Various conflicts and tensions around the world are driving a robust demand across all business segments and this is expected to continue. The sales growth breakdown by business unit is as follows:

• Marine Systems: 15%

• Aerospace 12% 

• Combat Systems +8.5%

Gulfstream business jets demand is also strong. GD is confident that its new G700 Gulfstream jet will receive certification in Q1. This should unlock a "surge of deliveries", according to CEO Phebe Novakovic.

Lingering supply chain issues continue to drive costs up, applying pressure to margins and earnings. This is expected to continue in 2024.

Revenue Growth

We have modeled an 11.72% revenue growth figure for 2024, in accordance with FY company guidance. Subsequently, we have moderated sequential revenue growth figures to a conservative 9%.

Gross Profit Margin

We have modeled Gross Profit Margin to an average of 16%, in line with previous years.

Operating Expenses

We have modeled Operating Expenses as a percent of revenues to 4.8%, in accordance with company guidance.

Shares Outstanding

We have kept the number of shares outstanding flat.

Valuation

We will assign an 11.5 EV / EBITDA multiple, so that the resulting Implied EV / Forward Sales reaches 1.71. The average for the GD Peer Group is 1.93, so our estimation is on the conservative side.

Ranking & Competition

The main and direct competitor to GD is Huntington Ingalls Industries (HII). To a lesser extent, we can also name Raytheon Technologies as well as Northrop Grumman as competitors. There does not seem to be a cut-throat business environment, as all companies share a certain part of defense contracts, and do not over-spep each other's specialty.

GD is ranked:

• 79 / 1500 in Millennium Alpha

• 23 / 263 in Manufacturing Sector

• 2 / 2 in the Ship & Boat Building Industry Group

• 2 / 6 in its Peer Group

This is a good ranking overall.

Fundamentals mapped to Technical Chart

We will assign a $294 median Price Target, and an 11% EPS Growth Rate.

Conclusion & Rating

With the Middle East conflict spreading and with no end in sight for the Ukraine-Russia war, along with rising tensions with China and North Korea, investors are betting that the strong demand environment will outlast supply chain disruptions.

We believe the excitement is well warranted. GD has the fundamentals, industry expertise, technical price performance and operates in a "perfect storm" as far as the business environment goes.

We currently view the stock as fairly priced, offering a balanced risk-reward to prospective investors.

Our rating is a solid BUY.