In this segment from Motley Fool Live, recorded on Jan. 4, Fool contributor Lou Whiteman takes an in-depth look at four factors that will help boost General Dynamics (GD -1.08%) stock this year.
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Lou Whiteman: It has been a nasty run ever since the great recession where a lot of companies were called into question for their spending habits. Business jets, you can see that, it's fallen off a cliff. That's from the General Aviation Manufacturers Association.
I am here to say that that is finally over. For one, there's three big manufacturers here. They all have brand-new, refreshed lineups, that's both good for sales and also it means that a lot of R&D work has gone in the last few years.
It's time to capitalize on that, you're going to see profits out of some of that work which should help per share numbers in the year to come, which is important to the story. More practically, the fleets are aging and pre-owned is becoming harder to find because pre-owned is always a little older, a 10-year-old business jet is dated, and if you're CEO of a multi-billion-dollar company, you don't want to fly last year's jets, do you?
The shaming of 2008, 2009 is over. It's been replaced by shaming of other things, quite frankly, which is how that cycle works. We have had something that has arguably been a catalyst for this sector, safety and convenience in a corporate environment. It's a good time to be in a business jet versus in a Southwest (LUV 1.09%) flight.
Look, so where are we going with this? This will lift all boats, including Fool pick Textron (TXT -0.96%), which I probably could have picked as my stock to watch, but they have so much else going on. Embraer (ERJ -2.82%) and long-suffering Bombardier (BDRBF -3.11%), which I wouldn't advise touching with a 10-foot pole. The one I want to talk about is General Dynamics.
This is mostly known as a defense company, but their Gulfstream unit, everyone knows Gulfstream, is 20% of revenue, even in a bad year, it was almost 30% in the 2000s. You can see the effect that has had on this company over the last decade. It has drastically, dramatically trailed, its two primary rivals, Northrop (NOC -1.06%), and Lockheed (LMT 0.59%). We can get into Boeing (BA -1.02%), Raytheon (RTX -0.08%), but they all have different components to them. It's even trailed the S&P 500.
While there is a lot of complexity in any company's 10-year story, Gulfstream is the simple answer to why. What's going to happen in 2022 which is why I think this stock right now.
Four factors. For one, as we just said, the business jet cycle has started. There are going to be supply chain caveats, this is a multi-year story because of what's going on with supply chains, it's probably a second half of the year, perhaps into 2023 story I'm going to guess it's 2022 for these purposes, but like this is a multi-year recovery, we have a lot of work to do to make up. You saw that chart from before, it's been a bad decade.
Secondly, this is still a large defense portfolio and arguably they match up well for the Pentagon's priorities. They are the single largest government IT vendor in a time when cyber is urgent to both the Pentagon, national security, and just better IT infrastructure throughout the government.
With what's going on in Ukraine, we suddenly have for the first time in a decade arguably since the Cold War, land vehicles matter. There's all sorts of Eastern European countries knocking on the Pentagon's door looking for land vehicles right now, and General Dynamics is the go-to vendor for that.
Also subs, they make the most important program in the history of the Navy, you will see that one snitty headline I'd put in by that snitty writer for the Fool.com. But the one military program, so important lawmakers actually agree on it, that's the Columbia-class sub, that's our nuclear deterrent. The ones we have out there can't float after a couple of years. This is the biggest, most expensive program in global naval history. It's going to happen and General Dynamics is the beneficiary.
Finally, all of this is going to add up to $5 billion dollars in excess cash over the next 18 months. I would say I showed you the chart just now about where they were with Northrop and Lockheed. Even if it's just catch-up, they still trail on an enterprise value to EBITDA. Even if the defense sector does nothing, you're going to see as Gulfstream recovers more parity.
