In 2011, with Congress' budget process locked in gridlock, legislators instituted a policy of "sequester," mandating automatic spending cuts on -- among other things -- U.S. military spending. Great was the lamentation at the Pentagon and its defense contractors when that happened, as everyone and anyone with skin in the defense game predicted the gutting of America's military, and the untimely demise of defense contractors' profits.
Well, guess what? It didn't happen. America's defense contractors are doing just fine.
In fact, some of them are doing more than fine. On Wednesday, General Dynamics (NYSE:GD), one of the nation's biggest defense contractors, updated investors on its 2014 results. Among them:
- Sales for the full year slipped a small fraction of a percent, to $30.8 billion.
- Operating profit margins, meanwhile, expanded by 70 basis points to 12.6%.
- Net income at General Dynamics jumped 11.2% to $7.42 per diluted share.
After accounting for a $0.41-per-share loss from discontinued operations, those earnings trumped analyst expectations by about $0.06. Viewed from one perspective, at least, General Dynamics did even better than meets the eye.
As reported on the company's cash flow statement, free cash flow for fiscal 2014 came to just more than $3.2 billion. Relative to last year's $2.7 billion cash haul, that's a 20% increase in cash profits at General D -- and the years to come could be even better. Here's how:
According to General Dynamics, while revenues may have flatlined last year, total backlog of orders placed by its customers -- orders that will transform into revenue in future years -- surged 58% to $72.4 billion. And that's not even counting the value of as-yet-unexercised options, and the tail ends of ongoing IDIQ contracts. Factor those anticipated sales into the mix, and GD's real backlog number may be closer to $99.1 billion.
What it means to you
What does all of this mean to you as an investor? At $46 billion in market cap, General Dynamics stock currently sells for about 18.6 times trailing earnings. Valued on actual free cash flow, however, the company costs an even cheaper-looking 14.3 times FCF.
Relative to anticipated long-term earnings growth of 10%, and General Dynamics' 1.8% dividend yield, this still doesn't add up to General Dynamics stock being "cheap" -- but it's close. Close enough that while I, personally, will not be joining the buyers of GD stock, I will begin window shopping.
No, Fool contributor Rich Smith isn't really going to buy a tank. But he might buy a tank stock -- or an actual Humvee. Rich does not own shares of, nor is he short, any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 296 out of more than 75,000 rated members.
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