Key Points
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General Dynamics beat sales and earnings estimates soundly this morning.
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General Dynamics is on a roll, racking up new orders, growing sales, and growing profits even faster.
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Problem is, the stock costs too much.
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10 stocks we like better than General Dynamics ›
Shares of General Dynamics (NYSE: GD), maker of Abrams main battle tanks and Gulfstream business jets, reported powerful earnings this morning, sending its stock up 6.1% through 10:50 a.m. ET.
Analysts forecast GD would earn $3.44 per share on $12.2 billion in Q2 sales. Instead, the defense giant reported a $3.74-per-share profit on sales of $13 billion.
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General Dynamics Q2 earnings
Sales climbed 8.9% year over year, and operating profit margin expanded 30 basis points to 10%. With these improved margins, earnings managed to grow 14.7%. Long-time CEO Phebe Novakovic noted that “each of our four segments achieved growth in revenue and earnings,” while cash flow was “strong” and the company’s backlog remains “healthy.”
Indeed, I’d go farther than that. Better than just “healthy,” backlog now looks fantastic, thanks to General Dynamics’ scoring a book-to-bill ratio (that’s new orders taken in relative to older orders fulfilled and converted to revenue) of 2.2 for the quarter.
Backlog now stands at $103.7 billion, enough to keep GD humming for the next two years straight.
Is General Dynamics stock a buy?
With its positive free cash flow of $4.1 billion, General Dynamics’ cash profits fully back up reported trailing earnings of $4.1 billion. The company is projected to grow earnings better than 9% annually over the next five years, and it pays its shareholders a respectable 2% dividend yield.
Based on these numbers, I’d value the stock at a minimum of $45 billion — and probably a bit more based on the tremendous future sales growth implied by its book-to-bill ratio. That said, after today’s run-up, GD stock currently costs well over $80 billion — and I’m afraid that’s too much to pay at present.
My advice: Wait for better prices before buying GD stock.
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
