General Dynamics (NYSE:GD) appears to be a winner in the current geopolitical environment. The aerospace and defense giant, renowned for its contributions like the M1 Abrams Tank, Virginia-class Submarines, and other cutting-edge weapons systems, is clearly thriving amid escalating global conflicts. Its latest earnings report was impressive, and its record-breaking backlog indicates that the favorable conditions driving its growth are likely to persist. Accordingly, I’m bullish on the stock.
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How the Global Political Environment Affects General Dynamics
General Dynamics has emerged as a significant beneficiary in the current global geopolitical landscape. The presence of wars and conflicts invariably leads to substantial defense budgets. Given that General Dynamics plays a pivotal role, with its armored vehicles and weapon systems being integral components of the arsenals of Western nations, the company is poised to secure highly-profitable contracts continuously.
Notably, General Dynamics has already been supplying its combat vehicles, like the Stryker and Abrams tanks, alongside various other equipment, to Ukraine through NATO allies. Furthermore, Israel’s Defense Forces (IDF) have heavily relied on the company’s missile systems.
It is evident that the company is capitalizing on both ongoing conflicts, whether it’s Ukraine exhausting NATO’s resources or the IDF utilizing its proprietary systems and ammunition. This dynamic translates into a growing number of forthcoming supply orders for General Dynamics.
In the meantime, there is the potential for further geopolitical instability and looming threats on multiple fronts, including the prospect of a conflict between China and Taiwan. Therefore, it is evident why General Dynamics’ investment proposition has become increasingly compelling.
Robust Results to be Sustained by Record Order Backlog
General Dynamics’ most recent results were robust, reflecting the ongoing industry tailwinds. Moreover, the company has showcased its strength by establishing a record-breaking order backlog, underscoring its commitment to sustained excellence in future performance. Plus, in the third quarter, the company saw a 6% increase in quarterly revenues, reaching $10.6 billion. Let’s break down the quarterly results.
Aerospace & Combat Systems
While aerospace revenues did experience a dip of 13.4% to $2.0 billion, attributed to supply-chain constraints leading to fewer deliveries at Gulfstream, Combat Systems revenues displayed a remarkable surge of 24.4%, reaching $2.2 billion.
This impressive growth in the Combat division was driven by expansions across all business units, particularly at Ordnance and Tactical Systems (OTS) and European Land Systems. Furthermore, the results were bolstered by facility contracts to augment artillery production capacity.
The increase in Combat revenue can be attributed to new international vehicle programs, the ramp-up of the M10 Booker, elevated artillery program volume, and heightened volume of Piranha and Eagle vehicles in Europe. These strides vividly illustrate how General Dynamics continues to harness the tailwinds of the ever-evolving geopolitical environment.
Marine Systems
General Dynamics witnessed notable improvements in its Marine Systems division, as revenues surged by 8.4% to reach $3.0 billion. This upward trajectory can be primarily attributed to the progress made in Columbia-class construction and engineering. Furthermore, at the Bath facility, there are promising indications of increased productivity that have yet to fully translate into the division’s financial performance. Consequently, the division’s future outlook appears quite compelling.
Technologies Division
Significant revenue growth was achieved in Technologies — the division dedicated to serving a diverse clientele encompassing military, intelligence, and federal civilian sectors — coming in at 7.9%. This increase pushed revenues to a remarkable $3.3 billion. Notably, this growth was distributed quite evenly between two key players — General Dynamics Information Technology (GDIT) and Mission Systems.
Remarkably, both of these businesses exhibited robust growth not only year-over-year but also sequentially. GDIT, in particular, showcased remarkable strength in its defense and federal civilian portfolios. This success can be attributed to strategic investments in technology accelerators and the utilization of advanced abilities like zero trust, AI, digital engineering, and 5G communications. These investments are strongly resonating with customers and driving increased demand.
The Increasing Backlog
The current trend in General Dynamics’ revenues should not be a temporary event, as the ongoing conflicts taking place are set to keep generating substantial order volumes for the company. Notably, the company’s order backlog hit a new all-time high in Q3, reaching $95.6 billion.
Furthermore, the company’s projected potential contract value, signifying management’s assessment of added value within non-funded indefinite delivery, indefinite quantity contracts, and unexercised options, amounted to a substantial $37.3 billion.
Consequently, General Dynamics’ comprehensive estimated contract value, comprising the cumulative sum of all backlog components, reached an impressive $132.9 billion by the quarter’s end. Importantly, this figure surpasses the $125.8 billion recorded in the corresponding period of the prior year.
Is GD Stock a Buy, According to Analysts?
Regarding Wall Street’s view on the stock, General Dynamics features a Moderate Buy consensus rating based on 10 Buys and four Holds assigned in the past three months. At $273.08, the average General Dynamics stock price prediction implies 11.95% upside potential.
If you’re not sure which analyst you should follow if you want to buy and sell General Dynamics stock, the most profitable analyst covering the stock (on a one-year timeframe) is David E. Strauss from Barclays. His track record boasts an average return of 15.56% per rating and a 71% success rate. Click on the image below to learn more.
Conclusion
In conclusion, General Dynamics’ strong performance and strategic positioning within the current global geopolitical environment are undeniably promising. As international conflicts drive the demand for defense and weaponry, the company has shown its capability to capitalize on these opportunities, securing substantial contracts from various nations.
Moreover, the company’s recent financial results and record-breaking order backlog indicate a clear path to sustained growth. With ongoing global uncertainties and escalating tensions, General Dynamics stands as a compelling investment proposition, poised for continued success in the ever-evolving landscape of international affairs.
