File this story under the category "every little bit helps."
Late last week, General Dynamics' (GD 0.11%) Canadian subsidiary General Dynamics Land Systems-Canada announced it won a contract to upgrade 141 Canadian Army Light Armoured Vehicle III armoured personnel carriers. As the company explained, it will be upgrading the vehicles to a new "LAV 6.0 configuration", enhancing the vehicles' "protection and mobility" and adding "onboard vetronics" (i.e. avionics for land vehicles). Perhaps most importantly, the company will replace the vehicles' monohull chassis with a "double-V" design that enhances resistance to anti-vehicle mines -- much as the U.S. Army is doing with its Stryker APCs, also built by General Dynamics.
LAV contracts advance to occupy General Dynamics' bottom line. Image source: General Dynamics Land Systems.
At current exchange rates, the CA$404 million contract works out to about $309 million in value -- a relative drop in the bucket of General Dynamics' $31.4 billion annual revenue stream. And yet, this is a particularly valuable "drop" for General D.
We're No. 2!
General Dynamics' most valuable business division is actually its aerospace unit, which is responsible for producing Gulfstream business jets for the civilian market. Last year, GD Aerospace booked $8.4 billion in revenues for the company; the second largest division by revenues, and earned 20.5% operating profit margins on those revenues; making aerospace by far the most profitable of General Dynamics' four main business divisions.
But of course, General Dynamics has always been best known for its combat systems division, which builds the famous Abrams main battle tank, and which also encompasses General Dynamics Land Systems -- which in turn builds the Canadian LAVs. At 16.3% in operating profit margin, this is the company's second most profitable division. Sadly, it's also the company's smallest division by revenue (just $5.6 billion booked last year according to data from S&P Global Market Intelligence).
This, in a nutshell, is why last week's contract announcement is relevant to investors in General Dynamics stock. Clearly, the best way for this company to grow its profits in future years will be to improve the fortunes of its aerospace business -- but that may need to wait on a revival of the global market for business jets. In the meantime, in the more immediate future, General Dynamics can add revenues and add profits at its second most profitable business -- combat systems -- by winning more work upgrading armored vehicles it has sold, and selling new ones.
Last week's contract is an important, if small, step toward that goal. The bigger step will be delivering on Saudi Arabia's contract to buy more than 3,000 new LAVs built by General Dynamics' Canadian subsidiary. We'll keep you updated on that one, as well as on such smaller deals as the Canadian upgrades contract, as details come to light.
