Army, Navy, and e-Force (the "e" is for "battlefield electronics") defense contractor General Dynamics
Nonetheless, all the talk of defense spending cuts proposed by those peaceniks at the Pentagon has taken its toll on General D's stock over the past few weeks, knocking it down about 4% since the beginning of the year, and another percent or so on Friday. Mr. Market seems to be expressing his strong opinion that peace will soon break out -- if only because we can no longer afford to keep fighting wars -- and at that point, General D's profits will tank (pardon the pun.)
Moreover, if you look closely at the results, you'll see that the company's growth in GAAP earnings did not translate into much free cash flow (FCF) growth at all. Last year, General D. generated $1.5 billion worth of the green stuff. This year, it was just $1.54 billion -- an increase hardly distinguishable from a rounding error.
On the other hand, the company does trade at a fairly modest price, which may make its mediocre FCF improvement a bit more palatable for investors with a value bent. Currently priced at an enterprise value (EV) of $23.9 billion, General D. sports an EV/FCF ratio of just 15.5. Is that cheap enough to make it a buy? Perhaps, but hold on a sec -- there are even better values out there.
As a group, the big defense contractors look pretty reasonably priced if, for whatever reason, the cost-cutting rumblings from Washington prove unfounded. But really, how often does the government spend more than it says it will?
For more Foolish musings on General D, read:
- A Good Day for General Dynamics
- Will the Navy Scuttle Shipbuilders?
- General Dynamics' Quarterly Blast
- General Dynamics-Lockheed Score