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Will Product Mix Overcome General Dynamics' Soft Backlog?

On May 13, 2016, we issued an updated research report on one of the defense majors, General Dynamics Corp. GD.

The company recently reported better-than-expected first-quarter 2016 earnings wherein its bottom line surged 9.3% year over year. The upside was driven largely by margin gains at three of the four business segments. Its operating income was up 2.5% over the prior year on a 40 basis point improvement in margins.

General Dynamics’ revenues are derived from a broad portfolio of products and services that help to keep the overall growth momentum steady. Its diverse customer base and an attractive product mix will help maintain a steady growth momentum and drive results in the quarters ahead.

During the first quarter, the company closed two acquisitions: the aircraft management and charter services unit of Avjet; and Bluefin Robotics, a maker of unmanned underwater vehicles. It strengthened its aircraft management and charter services in the U.S. with the takeover of Avjet, whereas Bluefin’s advanced underwater technologies and products are perfectly aligned with General Dynamics’ expertise in undersea system integration, thereby boosting its service periphery.

General Dynamics is poised to gain momentum post 2017, following the introduction of the G500 in 2018, major revenue recognition from Combat Systems’ huge backlog and the Ohio-class Replacement (“ORP”) submarine program, which should add substantially to the top line by 2019.

At its Electric Boat/EB subsidiary, the Navy announced its acquisition strategy for the $100 billion Ohio replacement program, which designates EB as the prime contractor responsible for about 80% of the construction of new subs. which will likely lead to meaningful revenue growth by the end of the decade.

However, General Dynamics’ first-quarter total revenue was down 0.8% from the year-ago level. Even total backlog at the company of $64.7 billion at the end of the first quarter was down 8.2% year over year. Funded backlog at quarter end also dipped 2.3% to $54.7 billion.

Although the present defense budget is more in favor of the sector, the earlier cuts have put pressure on the top lines of major contractors. The company may be adversely impacted by defense cuts and fall in orders as it derives about 57% of its revenues from orders by the U.S. government.

Zacks Rank

General Dynamics currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the defense space are Lockheed Martin Corp. LMT, Engility Holdings, Inc. EGL and CAE Inc. CAE, all with a Zacks Rank #2 (Buy).

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GENL DYNAMICS (GD): Free Stock Analysis Report
LOCKHEED MARTIN (LMT): Free Stock Analysis Report
CAE INC (CAE): Free Stock Analysis Report
ENGILITY HLDGS (EGL): Free Stock Analysis Report
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