General Dynamics: A Defense Stock that is an Offensive Play

If you liked trucks and planes and tanks when you were a kid, and still do, well, you gotta love the maker of some of the biggest toys out there. I am talking about uber-defense contractor General Dynamics (GD - commentary - Cramer's Take). One of the five major defense contractors in the country, General Dynamics' product line includes submarines, ships, tanks, land vehicles and ammunition. It even makes business jets under the Gulfstream moniker. This is the stuff of kids' dreams, but it is also the stuff of a very well run business that employs over 83,000 people and has revenue north of $27 billion.

The defense sector has been a subject of discussion with the presidential race in full swing. Some think a change in administration will lead to lower defense spending. I do not make predictions, but our country does not seem particularly bent on reducing spending on the military, and I do not look for General Dynamics to endure much change to its business prospects as a result of any change in the White House. Plus, the market for business jets is strong.

What I do think is General Dynamics is a well-focused company with a long track of solid performance, strong ties to the military and a good market position so it can profit from military spending here and abroad.

The Warren Buffett-Based Strategy

The company holds a major position among defense contractors, so it is not surprising that it attracts the attention of the strategy I base on how Warren Buffett invests. This strategy looks for companies that are among the largest in their industry, and General Dynamics is certainly one of the largest defense contractors.

The strategy also likes the company's earnings predictability. Out of the last 10 years, earnings per share have increased each year but one. That is pretty predictable and meets the strategy's hurdle for this variable.

An impressive aspect of General Dynamics is how little debt it has compared to its earnings. Debt is just over $2.1 billion, while earnings are just under $2.1 billion. The company can pay back its debt in just about a year, which is excellent.

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At the time of publication, Reese was long General Dynamics, although holdings can change at any time.

John P. Reese is founder and CEO of Validea.com, an investment research firm, and Validea Capital Management, an asset management firm serving affluent investors and companies. He is also co-author of the best-selling book, The Market Gurus: Stock Investing Strategies You Can Use From Wall Street's Best. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Reese appreciates your feedback. Click here to send him an email.

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