Goldman Sachs: Lower Price, Changing Outlook Now Make General Dynamics A Good Buy

Headwinds for General Dynamics Corporation GD in recent months now appear priced in just as those challenges are now being overcome, said Goldman Sachs in upgrading the F-16 and Gulfstream corporate jet maker’s stock.

The Analyst

Goldman Sachs analyst Noah Poponak upgraded General Dynamics from Neutral to Buy with a 12-month price target of $204.

The Thesis

Investors have driven GD’s share price down with concerns over higher margins at the defense and aircraft company’s Gulfstream division, and the production rate for Gulfstream’s G650 jet. Other concerns have included General Dynamics’ exposure to military combat vehicles in light of an ongoing peace era, and the growth in the company’s 2018 acquisition of IT services giant CSRA, Poponak said.

But General Dynamics’ share price relative to earnings is now too low – at a low end of its historical range - in light of the returns on capital and cash flow compounding ahead, according to Poponak.

IT has grown, with good bookings in the first quarter, the combat business grew in the quarter and Gulfstream margins have bottomed, he said.

“We think higher Gulfstream margins, the G500/600 ramp, IT organic growth, and a large improvement in free cash flow can all act as catalysts to reverse sentiment and valuation,” Poponak wrote in a note.

Price Action

Shares of General Dynamics were up 1.9 percent to $169.54 at time of publication Monday.

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