Defense Stocks

General Dynamics Corporation Valuation – January 2016 Update $GD

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Most Undervalued Companies for the Defensive Investor – November 2015.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how General Dynamics Corporation (GD) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): General Dynamics Corporation is an aerospace and defense company that offers a portfolio of products and services in business aviation; combat vehicles, weapons systems and munitions; communications and information technology systems and solutions, and military and commercial shipbuilding. The Company operates through four business groups: Aerospace, Combat Systems, Information Systems and Technology and Marine Systems. Aerospace group designs, manufactures and outfits a family of Gulfstream business-jet aircraft and provides aircraft services. Combat Systems group is engaged in systems engineering, spanning design, development, manufacture and support of military vehicles, weapons systems and munitions. Marine Systems group designs, builds and supports submarines and surface ships. Information Systems and Technology group provides technologies, products and services that support a range of military, federal/civilian and commercial information-systems requirements.

[level-free]

To read the details of this valuation, you must be logged in as a premium member. If you are not a premium member, please consider becoming one.

Premium members can view a full ModernGraham valuation of the company and have access to download a PDF version of the valuation for easy reference. Here is a free sample valuation pdf, and here is a post detailing what can be found within each individual company’s valuation.

[/level-free]
[not-level-free]

Downloadable PDF version of this valuation:

ModernGraham Valuation of GD – January 2016

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $42,759,500,036 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.16 Fail
3. Earnings Stability Positive EPS for 10 years prior Fail
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 45.35% Pass
6. Moderate PEmg Ratio PEmg < 20 19.79 Pass
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 3.92 Fail
Score
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 1.16 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 1.38 Fail
3. Earnings Stability Positive EPS for 5 years prior Fail
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

GD value Chart January 2016

EPSmg $6.61
MG Growth Estimate 0.25%
MG Value $59.45
Opinion Overvalued
MG Value based on 3% Growth $95.83
MG Value based on 0% Growth $56.17
Market Implied Growth Rate 5.65%
Current Price $130.80
% of Intrinsic Value 220.03%

General Dynamics Corporation does not qualify for either the Enterprising Investor or the more conservative Defensive Investor.  The Defensive Investor is concerned with the low current ratio, insufficient earnings stability in the last ten years, and the high PB ratios.  The Enterprising Investor is concerned by the level of debt relative to the current assets as well as the lack of earnings stability over the last five years.  As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities at this time or proceed with a cautious speculative attitude.

As for a valuation, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $6.50 in 2011 to an estimated $6.61 for 2015.  This level of demonstrated earnings growth does not support the market’s implied estimate of 5.65% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value below the price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on General Dynamics Corporation (GD)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Stage 3: Information for Further Research

GD Charts January 2016

Net Current Asset Value (NCAV) -$21.61
Graham Number $82.41
PEmg 19.79
Current Ratio 1.16
PB Ratio 3.92
Dividend Yield 2.53%
Number of Consecutive Years of Dividend Growth 2

 

[/not-level-free]

Useful Links:

ModernGraham tagged articles Morningstar
Google Finance MSN Money
Yahoo Finance Seeking Alpha
GuruFocus SEC Filings

Most Recent Balance Sheet Figures

Balance Sheet Information Sep15
Total Current Assets $15,288,000,000
Total Current Liabilities $13,178,000,000
Long-Term Debt $2,912,000,000
Total Assets $32,980,000,000
Intangible Assets $12,333,000,000
Total Liabilities $22,246,000,000
Shares Outstanding (Diluted Average) 321,938,000

Earnings Per Share History

Next Fiscal Year Estimate $8.89
Dec14 $7.42
Dec13 $6.67
Dec12 -$0.94
Dec11 $6.87
Dec10 $6.81
Dec09 $6.17
Dec08 $6.17
Dec07 $5.08
Dec06 $4.56
Dec05 $3.61
Dec04 $3.05
Dec03 $2.52
Dec02 $2.26
Dec01 $2.33
Dec00 $2.24
Dec99 $2.18
Dec98 $1.46
Dec97 $1.37
Dec96 $1.07
Dec95 $1.28

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $6.61
Dec14 $5.43
Dec13 $4.67
Dec12 $4.11
Dec11 $6.50
Dec10 $6.13
Dec09 $5.57
Dec08 $5.01
Dec07 $4.21
Dec06 $3.58
Dec05 $2.98
Dec04 $2.60
Dec03 $2.35
Dec02 $2.21
Dec01 $2.09
Dec00 $1.87
Dec99 $1.62

Recommended Reading:

Other ModernGraham posts about the company

5 Speculative and Overvalued Companies to Avoid – December 2014
32 Companies in the Spotlight This Week – 12/6/14
General Dynamics Corporation Annual Valuation – 2014 $GD
10 Companies in the Spotlight This Week – 11/30/2013
ModernGraham Valuation: General Dynamics Corp. (GD)

Other ModernGraham posts about related companies

Precision Castparts Corporation Valuation – January 2016 Update $PCP
United Technologies Corp Valuation – November 2015 Update $UTX
Northrop Grumman Corporation Valuation – November 2015 Update $NOC
Raytheon Company Valuation – October 2015 Update $RTN
Precision Castparts Corporation Analysis – October 2015 Update $PCP
Raytheon Company Analysis – July 2015 Update $RTN
Precision Castparts Corporation Analysis – June 2015 Update $PCP
L3 Communications Holdings Inc. Quarterly Valuation – May 2015 $LLL
Raytheon Corporation Quarterly Valuation – April 2015 $RTN
Precision Castparts Corporation Quarterly Valuation – February 2015 $PCP

Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Back To Top