General Dynamics (NYSE:GD) ended FY2023 on a high note, boasting the highest year-end backlog in its history, totaling $93.6 billion. It has effectively set the stage for record profits in FY2024. The aerospace and defense giant, known for the Stryker, the Abrams tank, and Virginia-class and Ohio-class submarines, among other weapons systems, is currently benefiting from a highly unstable geopolitical environment. With no signs of ongoing crises reversing, I believe that GD stock can keep rising.
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General Dynamics Benefits from Geopolitical Tensions, Growing Defense Budgets
It’s safe to say that we are currently experiencing one of the most tense geopolitical environments in decades. The more popular conflicts right now include the ongoing war in Ukraine and the ongoing Israel-Hamas conflict.
In Ukraine, fierce battles persist with no end in sight, while the situation in the Middle East remains very tense, with Israel’s Prime Minister Benjamin Netanyahu reiterating that he plans to carry out a ground offensive inside Rafah. The ongoing threat from the Houthis has also resulted in the Red Sea effectively remaining closed for commercial ships.
In the meantime, a multitude of other conflicts have ignited globally. Asia is presently the stage of 19 non-international armed conflicts (NIACs), while in Africa, more than 35 NIACs are taking place across 12 countries, including Burkina Faso, Cameroon, the Central African Republic, the Democratic Republic of the Congo, and Ethiopia, among others.
Naturally, General Dynamics has emerged as a significant beneficiary in the current global geopolitical landscape. The presence of wars and conflicts inherently leads to growing defense budgets. Further, given that General Dynamics plays a pivotal role, with its armored vehicles and weapon systems being critical parts of the arsenals of Western nations, General Dynamics has been securing highly profitable contracts.
As far as how the major conflicts currently benefit General Dynamics, the company has been actively providing its range of combat vehicles, including the esteemed Stryker and Abrams tanks, to Ukraine via NATO. Additionally, Israel’s Defense Forces (IDF) have been utilizing General Dynamics-produced advanced missile systems.
The extent to which General Dynamics weapons systems are deployed by Western proxies in Asia and Africa remains uncertain. Nevertheless, it’s reasonable to assume that third-party involvement in these conflicts indirectly drives up the defense budgets of major powers, thus creating a favorable global environment for General Dynamics.
FY2023 Results Mirror Favorable Business Environment
The rather favorable business landscape for General Dynamics was clearly mirrored in its FY2023 results, with the company posting strong growth across the board. Particularly, the defense giant posted record quarterly sales of $11.67 billion in its Q4 results, up 7.5% compared to last year, with almost all divisions contributing positively to top-line growth. Let’s take a deeper look.
Aerospace
In the Aerospace division, revenues rose by 12% to $2.7 billion. Note that this division remains entirely detached from any association with war or conflict. Instead, the company’s exceptional performance is attributed to the sustained robust demand for Gulfstream aircraft, the strength of the Gulfstream service business, and the continual expansion of the jet aviation sector. Still, it’s essential to highlight the continuing success within the Aerospace business.
Combat Systems
The Combat Systems division’s performance, on the other hand, is closely tied to ongoing conflicts. In Q4, revenues rose by 8.5% to $2.4 billion. Growth was driven by increased sales in ordnance, tactical systems, and European land systems, particularly in artillery and propellant volume.
This was fueled by expanded production programs, higher sales of military equipment like piranhas, bridges, and eagles in Europe, and new international tank initiatives. The division’s success is directly linked to The Russo-Ukrainian war, with the U.S. Abrams tank first seen in the region a few months ago.
Marine Systems
The Marine Systems division also performed well in Q4, recording revenue growth of 14.8% to $3.4 billion. This growth here was powered by higher volumes in Columbia-class construction and engineering, T-AO volume (the new fleet of oilers for the U.S. Navy designed to transfer fuel to the carrier strike groups operating at sea), and BAT (a type of vehicle) service contracts.
With the Suez Canal remaining effectively closed due to a continuous threat from the Houthis in the Red Sea, it’s quite likely that the U.S. will continue to invest heavily in its Navy to restore security in the region. This should translate to a long-term growth tailwind for the General Dynamics Marine Systems division.
Technologies
General Dynamics’ Technologies was seemingly its weakest performer in Q4, with revenues declining by 3.1% to $3.2 billion. However, this decline can be mostly attributed to last year’s fourth quarter, which saw the company resolve a logjam in the supply chain and deliver an abnormal number of products, lifting revenues considerably. Thus, the decline was mostly due to tough comps. After all, I.T. revenues were up in all four quarters compared with 2022.
Backlog Points to Record Revenues and Profits in FY2024
General Dynamics ended FY2023 with a massive backlog, which has set the stage for record profits in FY2024. I believe this is evidence that the ongoing growth momentum isn’t going anywhere anytime soon. Geopolitical tensions continue to generate substantial order volumes for the company. In fact, the order backlog reached $93.6 billion — the highest year-end backlog in the company’s history.
Additionally, the company’s projected potential contract value, which represents management’s estimate of added value within non-funded indefinite delivery, indefinite quantity contracts, and unexercised options, amounted to a substantial $38.3 billion. Therefore, General Dynamics’ total estimated contract value, the sum of all backlog components, was $132 billion at the end of the year.
The current backlog translates to significant cash flow visibility for the company. It essentially guarantees a substantial portion of this year’s and next year’s revenues. Evidently, with deliveries projected to grow in tandem with growing customer orders, Wall Street’s consensus estimates project record revenues of $46.5 billion and record EPS of $14.65 in FY2024, marking a strong uptick of about 10% and 22%, respectively.
Is GD Stock a Buy, According to Analysts?
Regarding Wall Street’s view on the stock, General Dynamics features a Strong Buy consensus rating based on 12 Buys and four Holds assigned in the past three months. At $294.75, the average General Dynamics stock forecast implies 4.1% upside potential.
If you’re not sure which analyst you should follow if you want to buy and sell General Dynamics stock, the most accurate analyst covering the stock (on a one-year timeframe) is Peter Arment from Robert W. Baird. His track record boasts an average return of 14.17% per rating and an 85% success rate. Click on the image below to learn more.
Conclusion
To sum up, General Dynamics is set to post record revenues and profits in FY2024, powered by its massive $93.6 billion order backlog. The company’s leading position in the aerospace and defense industry, along with escalating global geopolitical tensions and increasing defense budgets, guarantees promising results for this year, if not for multiple years to come, snowballing financials. I believe that this trend will keep the bullish momentum on General Dynamics hot, fueling the stock’s investment case.
