General Dynamics has been treading water for the past six months, recording a small return of 4.5% while holding steady at $347.44. The stock also fell short of the S&P 500’s 10.9% gain during that period.
Is now the time to buy General Dynamics, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is General Dynamics Not Exciting?
We’re sitting this one out for now. Here are three reasons you should be careful with GD, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
Examining a company’s long-term performance can provide clues about its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Unfortunately, General Dynamics’s 6.9% annualized revenue growth over the last five years was mediocre. This was below our standard for the industrials sector.
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect General Dynamics’s revenue to rise by 3.8%, a deceleration versus its 6.9% annualized growth for the past five years. This projection doesn’t excite us and implies its products and services will face some demand challenges.
3. Free Cash Flow Margin Dropping
Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, General Dynamics’s margin dropped by 2.4 percentage points over the last five years. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. If the longer-term trend returns, it could signal increasing investment needs and capital intensity. General Dynamics’s free cash flow margin for the trailing 12 months was 11.5%.
Final Judgment
General Dynamics’s business quality ultimately falls short of our standards. With its shares trailing the market in recent months, the stock trades at 20.8× forward P/E (or $347.44 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We’re pretty confident there are more exciting stocks to buy at the moment. We’d recommend looking at one of our top software and edge computing picks.
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