While the geopolitical turmoil in Ukraine, Gaza, Iraq and Syria has so far been nearly ignored by the markets, one industry – aerospace and defense – is a clear beneficiary. That 1980s bogeyman, the Russian bear, has returned and U.S. military intervention against ISIS may be looming. General Dynamics (GD.N), one of the world’s largest defense contractors, has been on a recent tear, with its stock price having surged 33% YTD. “Buy on the sound of cannons,” indeed.
Despite the doom and gloom forecasts that have enveloped the sector since 2008, revenue has held up surprisingly well – and there are always new large scale projects (long range bombers, army vehicles, cyber warfare) on which governments are going to spend money.
Here’s an example: despite its well-known frugality, the U.K. coalition government recently awarded GD a £3.5 billion contract to supply 589 Scout specialist vehicles to the British Army between 2017 and 2024. Given the wear and tear on both British and American military vehicles in the Middle East and Asia, this represents a major opportunity for GD.
Source: Thomson Reuters Eikon, StarMine
High scores for GD
Indeed, given the Obama administration’s increased assertiveness in foreign policy, one could almost claim to see some turnaround in defense spending after five lean years, especially if Mr. Putin’s strategy backfires to the point where NATO members undertake a more fundamental reappraisal of their limited defense budgets.
GD’s price performance certainly indicates some enthusiasm from the market – the company scores in the top 1% for price momentum in North America and as you can see in the below screenshot from Thomson Reuters Eikon – the company gets great scores on almost every metric. One cautious note, however – although Val-Mo is high, most of that score is momentum, not valuation.
Source: Thomson Reuters Eikon, StarMine
Institutional love
The Smart Holdings score suggests a strong likelihood of increased institutional ownership, though that is based on GD having attractive metrics that seem to be in vogue with institutional asset managers, not the more thematic story described above. For the curious, GD scores well on these metrics: price momentum, interest coverage and trailing ROE.
Source: Thomson Reuters Eikon, StarMine
The debt picture
Credit markets are also enthusiastic, with the Markit 5 year CDS trading at recent lows, implying little market concern about default probability. GD’s debt structure is also attractive, with the majority of debt instruments maturing far into the future (see chart below). GD also scores well from an earnings quality standpoint, with the cash flow component (measuring free cash flow) in the top 10% for North America and well above industry median levels.
Source: Thomson Reuters Eikon, StarMine
Portfolio performer?
Whether you prefer more thematic investing, qualitative or quantitative, given the uncertainty in the world today and the significant chance of increased volatility – GD looks like an interesting portfolio addition that may help weather the ups and downs more effectively.
It may not win a place in the hearts of most environmental, social and governance (ESG)-focused investors due to its focus on combat systems, but for the more pragmatic who just want a solid return profile, this could be a strong performer in uncertain times.
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