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General Dynamics: Why So Cheap?


General Dynamics is cheaper than most peers.

The company is a leader within the sector with regard to capital allocation.

Almost 20 years of consecutive dividend increases, coupled with a strong balance sheet.

Shares are fairly valued in a market with above-average valuations.

The defense sector seems to have held up rather well over the course of the last few years despite U.S. defense spending dropping by 25% from 2008-2015. Much of this can be attributed to multiple expansion, just like much of the overall market.

GD PE Ratio (<a href=

GD PE Ratio (TTM) data by YCharts

General Dynamics (NYSE:), however, seems to have dislocated from its peers Lockheed Martin (NYSE:LMT), Northrop Grumman (NYSE:NOC) and Raytheon (NYSE:RTN). This is what initially grabbed my attention, which led me to ask myself "why?"

Not exactly struggling...

I've owned General Dynamics in the past, but only loosely follow the company now. While 15 times earnings probably isn't a screaming bargain on an absolute basis (more on that later), the discount to its peers struck me as a little strange.

First off, the company's backlog has significantly improved since its record low in 2013 - now comfortably sitting at almost $65 billion as of its first quarter in 2016.

General Dynamics has four segments:

  • Aerospace (accounted for 28% of FY2015 sales)
  • Combat Systems (18% of FY2015 sales)
  • Marine Systems (25% of FY2015 sales)
  • Information Systems and Technology, or IS&T (28% of FY2015 sales).

Its Gulfstream business supplies lots of corporate jets, and the company controls about half of the large-cabin aircraft market, according to Morningstar. Its overall Aerospace market share is around 30% ex-light aircraft.

Its Marine Systems segment makes things like ships and submarines in a duopolistic US market. Not a lot of competition there. The Combat Systems segment makes Abrams Tanks which currently have an installed base of around 4,000, which often lead to spare parts and service sales. General Dynamics also is one of the few defense companies still pushing into the Federal IT services market, which it recently said was improving.

According to CEO Phebe Novakovic, as much of 70%...