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General Dynamics Defense Spending


...defense spending is only going to continue to rise, both in the U.S. and abroad with U.S. allies.

"Lord, I'm foolish to be here in the first place
I know some man gonna walk in and take my place
Ain't no way in the world, I'm going out that front door..."
One Way Out - (Allman Brothers and Sonny Boy Williamson)

For those that have never been, I very much recommend seeing the Allman Brothers Band's live at The Beacon Theater in New York at least once. It's a great venue for an incredible band with or without Dickey Betts.

At any rate, One Way Out got me thinking how in the current trading environment a more apropos title would be "One Way In" - as the flight from risk all seems headed into Treasuries. Call it flight to quality or risk aversion but no matter how you sugarcoat it still reeks of panic to me.

So, what to do? Well, we need look only to the inscription Benaiah wrote on the gold ring he presented to King Solomon: the Hebrew letters "gimel, zayin, yud", which began the words "Gam zeh ya-avor", or in English, "This too shall pass".

So let's do a little bargain shopping.

General Dynamics (GD), according to its website, "is a market leader in business aviation, land and expeditionary combat vehicles and systems, armaments and munitions, shipbuilding and marine systems, and mission-critical information systems and technologies".

In late July, General Dynamics reported 2Q EPS of $1.27 versus street consensus of $1.17. What struck me in its report was the funded backlog at the end of the 2Q was $35.4 bln with a total backlog of $44.6 bln. Not insignificant numbers for a company with a market cap of roughly $31.5 bln. On a valuation basis, GD trades around the same forward p/e multiple as Lockheed Martin (LMT), coming in around 13.50 or so. The concern for all the defense stocks will revolve around politics as we get closer to the 2008 U.S. elections.

But in my opinion, regardless of the outcome defense spending is going nowhere but higher as the world we live in will continue to bring new security challenges with both parties erring on the side of extreme caution. For empirical proof, it seems not a week goes by without one of the large defense companies getting a new contract.

The latest, in the case of General Dynamics, is a $2.25 bln modification contract from the U.S. Air Force. The skeptic will say "these numbers are already baked into the stock" and to a certain extent that may be true, but as I said - defense spending is only going to continue to rise - both in the U.S. and abroad with U.S. allies.

General Dynamics has been a great growth story since 2003 when the stock was trading around $27. I don't think the story is ending any time soon and as money continues to run for cover in Treasuries, look to pick up some of the great equity stories that are left, in haste, on the side of the road.
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No positions in stocks mentioned.

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