General Dynamics Soars As Investment Opportunity Despite Supply Chain Challenges (NYSE:GD)

I have been covering General Dynamics (NYSE:GD) financial results since June 2023 and I attached a buy rating to the stock despite supply chain challenges. That rating has worked out well so far with a 15.8% appreciation in share prices and a total return of 17.2% while the broader markets lost 2% perfectly demonstrating the appeal of aerospace stocks we highlight for investment.

General Dynamics stock is now trading $13 shy of my $255 price target and that provides a good time to review that target as well as discuss the most recent results.

Supply Chain Challenges Continue To Hit General Dynamics

While we do see quite some green arrows in the slide above, I would say that the overall performance has not been favorable or at least not directly been favorable. Compared to the second quarter, we see 4.1% growth in revenues and 9.9% growth in earnings which I would say is favorable as we see top line growth and margin expansion. The picture for the year-over-year figures is different with none of 6% growth in revenues translating to earnings growth. In fact, operating earnings are down 3.7% and net earnings are down 7.3% driven by supply chain challenges and revenue mix.

General Dynamics has four reporting segments, namely Aerospace, Combat Systems, Marine Systems and Technologies. In the Aerospace segment, revenues decreased by $315 million to $2.0 billion or a 13.4% decrease due to supply chain constraints at Gulfstream. Year-over-year, there was significant pressure on deliveries but sequentially things look better with 4% revenue growth and 13.6% higher earnings on higher delivery volumes. The year-over-year decline in delivery volumes seems to be impacted by the absence of G700 deliveries which were initially targeted for Q3 and as a result could not offset lower delivery volumes on other programs during the third quarter.

In Combat Systems, sales grew 24.4% while profits grew 10.7%. So, also in combat systems, we saw most of the top line growth being offset by lower margins. Revenues increased by higher Land Systems sales and higher artillery program volume. These programs are not accretive to margins in the current phase of the program, resulting in margins to drop to drop from 15.2% to 13.5%. Over time, the new programs should start to become accretive to margins which is long-term positive and the current margin drop is a transitionary effect.

For Marine Systems, we did see strength, with sales growing by 8.3% to $3.0 billion but profit decreased from 8.6% to 7% as we continue to see a challenging supply chain that has to regrow its ability to work on submarines at the desired rate. Margins are currently under pressure due to labor costs as well as late deliveries of materials to General Dynamics Electric Boat driving out-of-sequence work.

The Technologies segment saw 8% sales growth and profits increasing 10.5% due to margins expansion on a more profitable program mix. Margins of 9.5% are still lower than the 10.1% previously seen.

Overall, the story for the third quarter results from General Dynamics was in some way similar to the prior quarters. We did see revenue growth, but supply chain issues and mix continue to put a damper on results.

General Dynamics Provides Minor Change To Guidance

The second quarter results triggered General Dynamics to also update its guidance. For the third quarter, the company did not issue new guidance, but the company guided for 10 to 12 fewer airplane deliveries putting the delivery numbers at 133-135 deliveries offset by strong services revenues.

For Aerospace, the capacity at the FAA is pushing the certification of the G700 into the fourth quarter, of which some could spill over into 2024. The company expects around 19 deliveries for the G700 program this year, but if certification is not obtained by early to mid-December, that target could be sliding.

Is GD Stock A Buy?

With the margin pressure and supply chain issues, one can wonder whether General Dynamics is still a buy. For proper context placement, I think it’s important to realize that the performance during the previous quarters is not to be projected forward. For instance, in the first two quarters, G700 jets will be built that won’t be delivered from Q4 onward and the supply chain challenges are easing slowly but surely according to General Dynamics. That indicates to improvement in the remainder of the year. Furthermore, General Dynamics has a streak of 29 years of dividend increases, and while its 2.2% yield might not be juicy, coupled with a strong history of dividend increases, it’s a strong pointer that a very nice yield-on-cost can be built over time. So, I wouldn’t want to look at quarterly results to tell anyone to not hold this stock because its history shows strong return to shareholders via dividends.

Utilizing the evoX Financial Analytics tool, we see that General Dynamics is undervalued compared to its peers. Using its own usual enterprise to EBITDA multiple, we see that the stock is slightly overvalued with 2023 performance in mind, or said differently: 2023 earnings are already factored in. However, compared to the industry multiple, there’s around 13% upside to $272.08 per share, which is higher than the $269.63 per share price target that Wall Street has for the stock. If we factor in forward earnings for two years ahead, the price target is $278, providing 16% at the company median that is lower than the industry median EV/EBITDA. As a result, I maintain my buy rating on General Dynamics stock with a $278 price target.

Conclusion: General Dynamics Is For The Long-Term Investor

General Dynamics‘ third quarter results continued to be pressured by supply chain challenges and the absence of G700 deliveries during the quarter also eroded revenues at the Aerospace business.

If certification is finalized by December, this year we will already see some improvements, as pre-built G700s will start delivering and supply chain challenges will ease modestly. Overall, General Dynamics Corporation is for the long-term investor, in my view. The company has a solid track record of increasing its dividends, and its forward earnings show upside to the stock price for all years, excluding one scenario, whether you value the company in line with its peers or to its median enterprise-to-EBITDA multiple. So, I do believe that General Dynamics Corporation is a more than solid stock for shareholders to buy and hold.