General Dynamics Corporation (GD) was awarded a contract under the U.S. Army's Global Tactical Advanced Communications Systems (“GTACS”) and Services program. The program enables the rapid development and acquisition of a wide range of communications equipment and technical support needed by the U.S. Department of Defense and other federal agencies. The five-year indefinite delivery, indefinite quantity (IDIQ) contract has a total potential value of $10 billion if all options are exercised.
GTACS is administered by the Army's Program Executive Office, Command, Control and Communications-Tactical (PEO C3T), Special Projects Office, Northeast Regional Response Center and Project Manager, Warfighter Information Network – Tactical. The contract includes tactical command, control and communications system hardware, software, engineering, logistics, development, testing and systems-related support.
Headquartered in Falls Church, Virginia, General Dynamics engages in mission-critical information systems and technologies; land and expeditionary combat vehicles, armaments and munitions; shipbuilding and marine systems; and business aviation. The company operates through four segments: Information Systems & Technology (IS&T), Combat Systems, Marine Systems, and Aerospace.
General Dynamics was the third largest U.S. defense contractor in terms of revenue in fiscal 2011, after The Boeing Company (BA) and Lockheed Martin Corporation (LMT). The company is one of two contractors equipped to build nuclear-powered submarines in the U.S.
Looking forward, key growth drivers for General Dynamics include the improving business jet market, its stable business of U.S. military vehicles, a backlog (though declining) of $51.5 billion, an ongoing share repurchase program and strong cash flow generation. However, the company is largely tied to the U.S. defense budget, where the threat of budget cut is high. Also, we have turned slightly cautious about the company’s steadily dropping order backlog, and risks related to the execution of key projects.
General Dynamics’ total order backlog decreased to $51.5 billion at the end of the first nine months of 2012 from $59.6 billion at fiscal-end 2010. Going forward, the U.S. economic fundamentals are basically being kept on a leash as the Euro-crisis continues to cast its spell over the financial markets, keeping risks of further cutbacks in future defense budgets at a high level. Our apprehension is fueled by $15 trillion of national debt and an unemployment rate hovering around 7.9% which would lead to the Budget Control Act’s dictum of automatic cutbacks across the board going forward.
Going by the pulse of the economy and the pros and cons, we prefer to maintain our long-term Neutral recommendation on the stock. Moreover, General Dynamics holds a Zacks #3 Rank that translates into a short-term Hold rating.
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