Defense major General Dynamics Corp. (GD) announced that it will combine two units of its Information Systems and Technology business segment to create a new business unit based in Fairfax, VA. This marks the defense behemoth’s attempt to maintain margins in a declining revenue environment.
The share price of the company increased 0.3% to close at $125.77 on Sep 8, 2014 from the previous day’s closing session and finally hit a new all time high of $126.26 on Sep 9, 2014.
The company’s C4 Systems will merge with Advanced Information Systems to form a new unit called General Dynamics Mission Systems. Both the business units combined employ 13,100 people. Although jobs will be largely unaffected by the consolidation, some cutback may occur depending on redundancies. The restructuring − effective from Jan 2015 – is expected to make the company more efficient, cost-effective and responsive to customer needs.
As per media report, C4 Systems closed two units in Pennsylvania and Florida in February due to lower demand for military products. With this consolidation, the Scottsdale office of C4 Systems will remain operational led by its president, Chris Marzilli.
To maintain margins in a declining revenue environment, the defense operators are busy restructuring their businesses and engaging in prudent acquisitions.
We remind investors that General Dynamics had consolidated two of its combat systems units last summer. The recent announcement also followed a comprehensive review of its Information Systems and Technology business structure. The primary motive behind these actions is to leverage the complementary portfolios and sharpen competitiveness.
Since the start of 2014, there have been a number of share price gainers in the aerospace and defense industry with General Dynamics witnessing the highest increase of around 32.14%, buoyed by consistent performance. The contractor posted a 5.46% positive earnings surprise over the last four quarters on an average. Yet, its revenues fell 4.6% in the second quarter, missing the Street expectation.
What is more encouraging, this Zacks Rank #2 (Buy) company 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.
Other well-ranked defense players include Air Industries Group (AIRI), Lockheed Martin Corp. (LMT) and Northrop Grumman Corp. (NOC). Air Industries carries a Zacks Rank #1 (Strong Buy), while Lockheed Martin and Northrop Grumman hold a Zacks Rank #2 (Buy).
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