General Dynamics Could Regain Altitude

General Dynamics (GD - commentary - Cramer's Take) reports earnings next Wednesday, July 23. Analysts expect the company to earn $1.44 per share on revenue of $7.23 billion, up from of $1.27 per share and revenue of $6.59 billion in the year-ago period. I believe it could be worthwhile to nibble at GD shares ahead of that announcement.

General Dynamics operates through four business groups: aerospace, combat systems, marine systems and information systems and technology. The way I see it, the sum of these parts is greater than the whole.

The aerospace division consists of Gulfstream business jets and accounted for 18% of the company's sales in 2007. I believe investors have some doubts about whether the pace of private jet sales can be sustained in an economic downturn. Although the company's backlog extends past 2010, investors are likely to react more strongly to new orders than to shipments from backlog. It's worth noting, though, that more than half of Gulfstream sales are outside the U.S.

Another 35% of revenue accrued to the information systems and technology group, which provides electronics and software primarily used for defense purposes.

Combat systems accounted for 29% of sales and produces a variety of products, most notably the Stryker armored combat vehicle that has been so necessary in Iraq and Afghanistan. Stryker shipments under the current contract wind down in 2009, so the group will likely contribute less to future sales for some time, barring an escalation in combat operations. However, the unit continues to develop new systems and is expanding sales internationally.

As combat systems slow, marine systems seem poised to pick up the slack. In particular, production of Virginia-class submarines is now expected to double to two per year by 2011, one year earlier than previously thought. The unit's 18% share of 2007 revenue should rise in the years ahead.

A Full Pipeline

Sales forecasts through 2009 are more or less in the bag. The company's backlog at the end of March was $50 billion, and annual sales are in the $30 billion range. What's more, both orders and prices for aerospace and defense equipment have been increasing rapidly in the last few months. The backlog looks like it could grow still further.

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At the time of publication, Trent has no position in the companies mentioned, although positions may change at any time.

William A. Trent, CFA, is a freelance equity analyst based in the New York metro area. He has been an equity analyst since 1996 and is co-author of Understanding and Evaluating Prospectuses, Offering Documents, and Proxy Statements. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Trent appreciates your feedback; click here to send him an email.