What happened
It's been a tough year for defense stocks, and General Dynamics (GD 0.41%) in particular, as investors weighed the ramifications of the looming U.S. presidential election and the pandemic's impact on aerospace.
Both of those headwinds cleared somewhat in November, helping to boost General Dynamics' shares by 13.7% for the month, according to data provided by S&P Global Market Intelligence.
So what
After four solid years of Pentagon budget growth, there was a reason to believe budgets would flatten after 2020 regardless of who was in the White House, especially after the pandemic caused a flood of unexpected government spending. The idea of a "blue wave" election particularly spooked defense investors early in the fall, as some progressives are thought to favor domestic priorities over defense.
Image source: General Dynamics.
General Dynamics (GD) has been a laggard among defense prime contractors due to its large Gulfstream aerospace business. With business travel all but shut down due to the pandemic, demand for business jets has faded, choking off revenue for a large business inside GD.
November provided reason for investors to warm to the stock. The election did not produce the Democratic sweep that some had feared, and the chances of the Pentagon getting its budget squeezed in the years to come now looks remote.
Meanwhile, encouraging news concerning the development of a COVID-19 vaccine raised hopes we could soon be getting back to normal, which should be good news for Gulfstream.
Now what
General Dynamics had a great November, but the stock still has a lot of room to run. The company was an underperformer well before the pandemic, weighed down over the last few years by a business jet down cycle that has proven stubborn.
Looking ahead to 2021, General Dynamics' signature military platform, the Columbia submarine, is a top Pentagon priority that should survive any budget battle. And after a decade of slow sales, the nation's business jet fleet is aging, which should set up Gulfstream sales to recover as the pandemic fades.
General Dynamics trades at 13.8 times earnings, a discount to both Northrop Grumman (20.4 times earnings) and Lockheed Martin (15.6 times). As Gulfstream recovers, that discount should close, giving General Dynamics the opportunity to outperform the sector in 2021.
