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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

General Dynamic

June 3rd 2011 General Dynamic
NYSE Symbol: GD
Industry: Defense
Price as of 6/3: $70.60

The month of May ended on a good note with a 1% rally to cut in to the decline for the month. However, the start of June brought with it concerns of a slowing economy and a three day decline of over 300 points. Many investors have shied away from growth stocks looking for income and defensive ideas. This week we'll highlight a stock in the defensive sector, General Dynamic. General Dynamics famous for their Abrams battle tanks, Stryker vehicles, and Gulfstream jets is a market leader in business aviation; land and expeditionary combat vehicles and systems, armaments, and munitions; shipbuilding and marine systems; and mission-critical information systems and technology. In other words, you name it, they do it. The defense sector has performed well in the last year, consolidating in the last four months on concerns of slowing government spending. However management remains bullish on the fundamentals raising the dividend earlier in the year and recently initiating a 10 million share buyback. Just this week the company received an upgrade with an $84 price target which represents a 20% return from current levels. Plus the stock will go ex-dividend at the end of the month with a 2.5% yield. General Dynamic is not necessarily a defensive stock even though its' in the defensive sector, but the stock provides good value in a volatile market.

Back at the end of April, General Dynamic reported better than expected earnings thanks to higher margins in the business jet unit. Net income increased to $618 million, or $1.64 a share, from $597 million, or $1.53 a share, a year earlier. Quarterly revenue rose less than 1% to nearly $7.8 billion, missing estimates of $7.89 billion. Company-wide operating margins for the first quarter of 2011 were 11.9%, compared to 11.8% in first-quarter 2010. Operating margins for Aerospace, Combat Systems and Marine Systems grew when compared to the year-ago period. Dissecting the company, operating profits at the Aerospace unit, maker of the Gulfstream jets, rose 5.5% to $230 million. Sales at the unit declined less than 1% to $1.35 billion. Combat Systems sales fell 2.3% to $1.96 billion and operating profit gained 3% to $277 million. Revenue at the Marine Systems and Information Systems and Technology units rose 2.3% each to $1.68 billion and $2.82 billion respectively. Profit at the Information Systems unit fell 4.8% to $276 million and Marine profits increased 3% to $167 million. Funded backlog at the end of first-quarter 2011 was $43.9 billion. The Aerospace backlog increased for a second consecutive quarter, driven by continued demand for Gulfstream aircraft which will be a main driver of business going forward. The company's total backlog at the end of the first quarter 2011 was $57.6 billion. Looking forward, General Dynamic forecasted full-year profit of $7 to $7.10 a share. Analysts' average estimate is for profit of $7.12 a share on sales of $33.8 billion.

Currently General Dynamic trades for 10 times earnings, 9 times 2012 earnings estimates, less than 1 times sales, and 1.9 times book value of $37.30 a share. The company has over $2 billion in cash using some of that for the 10 million share buyback. Plus the company will go ex-dividend at the end of the month for 47 cents for an annual yield of 2.6%. Any investor looking for diversity in the defensive sector should take a look at General Dynamic.