General Dynamics (GD)

General Dynamics (GD)
Lots of press from General Dynamics this week. On Wednesday, the aerospace and defense company raised its dividend payment 8.6 percent. Then the next day, GD announced 1,200 job cuts and lowered its profit outlook amid weaker-than-expected demand for the company’s Gulfstream business jets.

The Gulfstream business (18 percent of 2008 revenues) is primarily driven by the health of corporate budgets and it was widely assumed for some time now that GD would reduce Gulfstream production plans – although the size of the reductions seem to have caught some off guard. Even with international orders making up over 50 percent of Gulfstream’s backlog, the global nature of the economic downturn has eliminated the benefit of geographic diversity.

GD now plans to deliver 73 large cabin jets in 2009 (previous guidance 94) and 24 midsize units (down from 30 before). The announcement also implied that 2010 large cabin orders should remain flat at 73, but I think there is potential for further downside in business jets. It will be important to keep an eye the cancellations for large cabin jets where margins are double those in the midsize segment, and thus are far more detrimental to operating profits.

Of course, GD’s defense groups remain strong and are expected to grow revenues by 20 percent from 2008 to 2010, mostly through organic growth (this is important for a company that is known for growth via acquisitions). Combat Systems is expected to increase sharply this year, and would get an additional boost if the administration’s request for over $80 billion in additional funding for Iraq and Afghanistan is granted. Marine Systems should also see good growth as it begins ramping up to double its submarine output through 2011.

GD shares currently trade near the lowest of the major defense-systems integrators – only Boeing (BA) has a lower multiple. This can be attributed to the market giving little value to Gulfstream, declining margins and uncertainty related to the U.S. defense budget. Still, GD’s strong product lineup and existing customer base will drive revenue growth over the long run.


UnitedHealth Group (UNH) +9.48%
Bargain hunters snapped up shares of UnitedHealth that were beaten down in previous sessions in response to Obama’s initial budget proposal that cuts payments to Medicare Advantage programs. Compared to its rivals, UnitedHealth has limited exposure to Medicare and enormous scale.

The government won’t finalize the reimbursement rates for Medicare Advantage plans until April, so there is plenty of time for additional fluctuation in sentiment.


General Electric (GE) +6.01%
The Wall Street Journal reported that GE officials, including CFO Keith Sherin, have been meeting daily of late with officials of credit-ratings agencies, who are considering reducing GE's Triple-A rating, the financial chief said. Sherin said the company is unlikely to be downgraded below AA, which would trigger roughly $8 billion in new costs. "I can't imagine it based on the knowledge I have and the reviews we've done," he said.


Quick Hits

• The Financial Wreck Surpasses the Tech Wreck
• Dividend Reductions Surpass 2008’s Record
• To Forecast or Not to Forecast?
• Immelt Meets Buffett in Market Roiled by Credit Swaps
  
  
  

Peter Lazaroff, Junior Analyst