General Dynamics Hits New 52-Week High on Higher Guidance - Analyst Blog

On Aug 21, 2014, shares of General Dynamics Corp. (GD) soared to a new 52-week high of $124.25, finally ending the trading session a little lower at $123.68. This defense prime with a market cap of around $41.6 billion has seen its shares rise roughly 29.4% so far this year, outperforming the 7.8% gain of the S&P 500 over the same period.

What's Driving General Dynamics Up?

General Dynamics is one of the largest U.S. defense contractors whose revenue exposure is spread over a broad portfolio of products and services that help it to keep the overall growth momentum steady. The company is one of the two contractors equipped to build nuclear-powered submarines in the U.S.

Since the start of 2014, there have been a number of share price gainers among the pure-play defense majors, with General Dynamics leading the pack, driven by consistent contract wins and a stable second-quarter 2014 performance.

The Pentagon's #3 contractor posted a 5.46% average positive surprise over the last four quarters. Yet, its revenues fell 4.6% in the second quarter, missing the Street expectation. Nonetheless, this defense behemoth recently increased its overall earnings outlook for the year to $7.40 to $7.45 per share from its earlier forecast of $7.05 to $7.10 per share. The company's cost-cutting initiatives spurred profitability even as defense spending by the U.S. government remained low.

The maker of Gulfstream jets, tanks as well as U.S. Navy ships expects to repurchase shares in the second half of 2014. The company has already spent approximately $2.7 billion on share buybacks so far this year.

Total backlog at the end of second-quarter 2014 was $71.1 billion, up 27% from the preceding quarter. The company's total potential contract value, the sum of all backlog components, increased 29% to $99.5 billion in the second quarter 2014 – this marks the highest for the company in the past four years.

Although the cloud of sequestration still hovers over the defense sector, hurting many programs, this will have a minimal impact on General Dynamics' future prospects. The escalating military tension in the Asia-Pacific region has provoked the U.S. Department of Defense to prioritize the company's prime shipbuilding programs. Earlier this year, the U.S. Navy signed a $17.6 billion multi-year contract with General Dynamics to build 10 Virginia-class submarines.

General Dynamics is a Zacks Rank #2 (Buy) stock. Other companies in the defense space worth considering include Northrop Grumman Corp. (NOC), Lockheed Martin Corp. (LMT) and Ducommun Inc. (DCO). Ducommun carries a Zacks Rank #1 (Strong Buy), while Northrop Grumman and Lockheed Martin hold the same rank as General Dynamics.