General Dynamics can survive defense cuts – Barron’s

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Defence contractor General Dynamics can survive US military spending cuts and thrive with the help of its Gulfstream jet division, Barron’s says. The business weekly said nearly three-quarters of General Dynamics’ US$32 billion in revenue comes from defence contracts, which will be severely cut back with budget reductions.

But the company is expected to make up for that setback with its new US$65 million G650 Gulfstream jet. The company has booked orders for 200 of the aircraft and can start customer deliveries in the second half of 2012, Barron’s said.

The weekly quoted Morgan Stanley analyst Heidi Wood as saying the company’s aerospace earnings could account for 50% of total earnings in the next five years, up from 20% now. She said margins, currently at 13%, could grow to the mid-20% level, according to Barron’s.

The weekly also cited Donald Porter, of value investors Dalton Greiner Hartman Maher, as saying General Dynamics’ stock could rise nearly 50% over its current level on the basis of the Gulfstream business. “They have years of backlog, even if the recession hits, they’ll have planes to make,” Porter was quoted as saying. “You’re paying a defence multiple for a company with a jet
business that will ramp very dramatically.”



Barron’s said he anticipated a multiple of 12 times earnings, which would put the stock at $91. General Dynamics closed last week at $60.64. The weekly also noted that Warren Buffett’s Berkshire Hathaway sold a large position in General Dynamics 10 years ago, but recently came back to take a significant position.