'Bizjet Product Transition' Led Cowen Analysts To Downgrade General Dynamics

In a report last week, Cowen analysts downgraded

from Outperform to Market Perform, with a price target of $153. The analysts expect the company to see a demand lull driven by product transition, which is likely to lead to a slowdown in earnings growth in 2016-2017. Following peak bizjet deliveries in 2014, there appears to be a downward pressure on demand, driven by weakness in Latin America, Russia and China, cannibalization of demand for current aircraft models due to six new products that are expected to be delivered in late-2016-2017, and increase in G650 deliveries to G550 owners who are selling their G550 models, thereby dampening demand and therefore pricing for G540-550. "GD's strategy of boosting deliveries of heavily backlogged G650 to make up for weaker G450/G550 demand makes sense and may avert a profit decline," the analysts said. The analysts expect

to witness a decline in book-to-bill, which highlights the risk associated with product transition during 2H16 and 2017. "We're still assuming that all of GD's defense sectors grow in 2015-16 with margin upside and that GD continues stock repurchase at a $3B/year rate," the analysts added.