Please ensure Javascript is enabled for purposes of website accessibility

Why Shares of General Dynamics Fell in March

By Lou Whiteman - Apr 3, 2020 at 9:56AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The Gulfstream business is going to have trouble rebounding in this environment.

What happened

Shares of General Dynamics (GD 2.64%) fell 17.1% in March, according to data provided by S&P Global Market Intelligence, double the declines experienced by defense rivals Lockheed Martin and Northrop Grumman. The culprit was not General Dynamics military operations but its Gulfstream commercial aerospace unit, which could find it hard to take off if the U.S. economy falls into a recession.

So what

Gulfstream has long been an albatross weighing on General Dynamics' results, with the business jet industry never recovering from the 2008-2009 recession. But there were indications heading into 2020 that this could be the year that all of that changed, thanks to a combination of an aging corporate fleet, new models to entice buyers, and changes in depreciation rules in the tax code.

A Gulfstream G650 in flight over water.

Gulfstream's G650 in flight. Image source: General Dynamics.

With each passing day as the COVID-19 coronavirus pandemic grew worse, the idea of corporations committing to a corporate jet buying spree in 2020 appeared increasingly laughable. A collapse in crude oil prices also dimmed hopes for new jet sales, as low fuel prices allow older, less fuel-efficient aircraft to better compete against newer models.

General Dynamics still has a large and growing defense business that figures to hold up pretty well even if the economy falls into a recession, with the Pentagon telegraphing it plans to move aggressively to make sure the industry and its suppliers weather whatever lies ahead. But aerospace sales account for about 25% of total revenue at General Dynamics, and it has proven to be difficult for the shares to get airborne without a lift from Gulfstream.

Now what

General Dynamics has been the worst-performing major defense stock over the past decade, due largely to Gulfstream. Every time it looks to be ready to turn a corner, something seems to happen to hamper the progress.

This is still a good company with a lot of attractive assets, and it trades at a valuation discount to its closest rivals. General Dynamics trades today at 11 times earnings and 0.978 times sales, compared with Lockheed Martin's 15.45 times earnings and 1.6 times sales and Northrop Grumman's 22.89 times earnings and 1.5 times sales. I still believe in the portfolio and expect General Dynamics to eventually close that gap. But given the current economic conditions, it is unlikely to happen quickly.

Lou Whiteman owns shares of General Dynamics and Lockheed Martin. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

General Dynamics Corporation Stock Quote
General Dynamics Corporation
$237.95 (2.64%) $6.13

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/13/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.