General Dynamics Cut To Hold At Deutsche Bank: Why Now?

Deutsche Bank’s Myles Walton downgraded the rating on General Dynamics Corporation GD from Buy to Hold, while lowering the price target from $170 to $152.

“We remain positive on GD's defense biz & while we've historically seen Gulfstream as a plus despite softening bizjet trends, the alarming G650 available-for-sale trends in the last few months has moved our opinion,” Walton explained.

G650s – Cause For Concern

Although the risks associated with the transition of the G450/550 to the G500/600 have been known, the G650 contributes two-thirds of the defense unit’s profit, with 2-3 G650/mo reaching the market for every 5/mo delivered.

Due to this, Walton expressed concern regarding sustainability, while pointing out that the available for sale G650s have risen from 9 to 22 in March 2016, from 4 in March 2015.

“Additionally, the continued downward asking price will start to impede on new G650 orders—if not cancellation activity,” the analyst stated.

Supply Above Demand

The realized prices for new aircraft is $675 million, and although there has not been much cancellation activity, possibly due to the large customer deposits, Walton noted that the increased inventory suggests that OEM production could be 20-30 percent above the actual demand in the medium term.

Although the 2016 EPS estimate has been maintained, the 2017 and 2018 EPS estimates have been lowered from $10.32 to $9.76 and from $11.20 to $9.99, respectively.