More growth to come?
A few potential catalysts could propel General Dynamics towards ahigher growth rate in the coming years. First, the "size of the pie " which is the budget of the Department of Defense continues to grow. President Joe Biden wants a 2% increase in spending for the 2022 budget. While military spending can fluctuate with wars and recessions, it has increased in the long run, almost doubling in the past 20 years.
In addition, General Dynamics' backlog has started to grow in recent years, which is equal to the total value of its recorded business, contracts that often last for several years. The company had an order backlog of $ 69.2 billion in the first quarter of 2019, which increased to $ 89.2 billion in the second quarter of 2021. The backlog is a general indicator of the forward-looking growth of the business. company, so a growing order book could be a sign of future growth.
Finally, the company has opportunities to develop its activity outside the army. Its aviation segment, which includes Gulfstream jets, recorded its highest order book since 2015 in the second quarter of 2021. As the pandemic has dampened activity in the aerospace industry, the rebound in demand could stimulate growth in the years to come. General Dynamics also makes less than $ 1 billion annually in foreign military sales and 30% of its sales in the private sector. These all have room to grow.
Investors don't need a dramatic increase in growth on the part of the company; even an increase in annual revenue growth of 3% to 4% could be enough to increase double-digit total returns.
Trading at a fair price
If we look at the estimates analysts, General Dynamics is expected to earn around $ 11.51 per share for the full year of 2021, which values the share at a price / earnings ratio of 17.5, a slight premium over the historical stock average over 10 years P Ratio / E of 16.
The forward P / E ratio of the S&P 500 is 21, a little more expensive than General Dynamics, and if we look at the S&P 500 With a historic average P / E ratio of 16, we see that the general market has deviated more from its standards than General Dynamics.
That's not to say that the stock is "cheap", but compared to an overall expensive market, General Dynamics appears to be trading at a fair price when you consider its fundamentals of quality. If we look at the reliable pidende and almost certain revenue streams that come with doing 70% of your business with the United States government, the company may be able tot be growing just enough for reliability to be reflected in its valuation.
Investors will want to watch the next few quarters of the business to see if revenue growth can accelerate a bit, but The high quality of General Dynamics deserves at least a thorough review of its current valuation.