General Dynamics Is a Portfolio Defender

While the Nortels (NT - commentary - Cramer's Take) of the world may come and go, it's nice to know that steady, high-quality companies like General Dynamics (GD - commentary - Cramer's Take) will always be around to help keep your portfolio from completely falling apart.

General Dynamics' stellar first-quarter earnings last week provided a great illustration of this. The company reported $1.34 per share in profit, up 21% from $1.21 per share in the first quarter of 2003. The results were a full 15 cents ahead of Wall Street's consensus estimate, and well ahead of even the company's own internal target.

This was not only a superb growth rate, but the earnings were also very high quality, with free cash flow of $276 million equaling net income -- an unusual occurrence in what is typically a weak cash-flow quarter for the company. "What you see is what you get; it's pretty straightforward," is how Chairman and CEO Nick Chabraja described the company's first-quarter release on its conference call.

Strong and Steady

Fortunately for Chabraja and longtime General Dynamics shareholders, Wall Street has grown to appreciate the company's steady record of clean results. At $93, the stock is trading close to its 52-week high. It's also up several percentage points this year already, beating the lackluster performance of the market overall.

Even so, the shares still look like a reasonable value, particularly considering 2005 estimates: They are bound to be proven low, as this year's estimates have been so far. Indeed, trading at a P/E ratio of 14.8 times next year's current consensus estimate of $6.30, General Dynamics is still trading at a discount to its peers, which trade at multiples of 15 to 16.

So far, all signs seem to suggest that General Dynamics has what it takes to keep beating earnings expectations for the foreseeable future. The company's top-line revenue jumped 39% in the first quarter. Although aided by acquisitions, that revenue was still supported by exceptionally strong organic growth that most analysts estimate came in at 19% companywide, but 23% from the defense businesses alone. The company's backlog rose 1.3% sequentially, with the funded portion up 6.9% to $27 billion, a funded book-to-bill ratio of 1.37. This strong backlog makes the outlook for General Dynamics' top line fairly secure.

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Odette Galli is a freelance columnist for RealMoney.com. She has been a writer at SmartMoney Magazine and a senior manager at Ark Asset Management, where she co-managed $3 billion in institutional assets. In addition, Galli was a senior vice president at J & W Seligman. At the time of publication, she had no positions in any of the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this commentary represent a recommendation to buy or sell stocks. She welcomes your feedback and invites you to send your comments to [e-mail].