General Dynamics Stock: Why It’s Time to Buy

Text size

General Dynamics M1 Abrams battle tanks.

Krisztian Bocsi/Bloomberg

Russia’s war in Ukraine shows no signs of ending, and news of civilian deaths in places like Kramatorsk, Bucha and Irpin – and the fact that they are likely intentional – has inspired grief and anger. With this as a backdrop, it is difficult to think about investing, especially in companies that manufacture weapons of war.

The market seems to have had a similar reaction. Defense stocks surged when Russia invaded Ukraine – exchange-traded fund Invesco Aerospace & Defense (ticker: PPA) gained 9.6% from Feb. 23 to March 7 – but have remained fairly subdued since . The dynamic was even more apparent in large defense stocks.

General dynamics

(GD) gained 14% but then fell 1.4%, while

Lockheed Martin

(LMT) rebounded 20% before falling 0.3%, and

Northrop Grumman

(NOC) jumped 24% before falling 1.8%.

Russia’s actions, however, demonstrate that more money will have to be spent on the military, if only to prevent what is happening in Ukraine from happening elsewhere. Like it or not, this should mean bigger profits for defense companies, as European nations, which had long resisted meeting NATO goals, are suddenly spending billions and Congress is increasing demands. budgets.

Wall Street forecasts do not reflect this new reality. Byron Callan of Capital Alpha Partners notes that they have barely moved since the start of the war and are actually lower since the start of the year. That doesn’t mean analysts don’t think earnings will eventually beat expectations, just that they probably won’t show up in first-quarter numbers and they’re waiting to hear from the companies before proceeding. to adjustments.

Still, defense stocks are worth watching, especially General Dynamics, says Cowen analyst Cai von Rumohr. He notes that the company derives about 40% of its earnings before interest and taxes from weapons and systems used in ground warfare, and those programs could get a boost in new budgets. He is also working on new, more mobile tanks and weapons for use on helicopters and drones. It could also be boosted by sales in Europe, says von Rumohr. General Dynamics should be able to offer more details when it releases its results on April 27.

General Dynamics is not just a defense company. It also manufactures Gulfstream business jets, and UBS analyst Myles Walton expects deliveries to exceed expectations.

The recent break leaves General Dynamics shares trading at $242.04, just above its 2018 and 2021 highs. This has created a “large base that suggests significant upside potential,” according to the technical analyst. of BofA Securities, Stephen Suttmeier.

If the fundamentals align with the technicals, that might be an understatement.

Write to Ben Levisohn at [email protected]

Comments are closed.