Stock Watch: General Dynamics is a good investment in 2023

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General Dynamics Corporation (NYSE: GD) is one of the most stable Wall Street firms catering to the most critical needs of the aerospace and defense industry worldwide. For the company, 2022 will be a productive year in terms of contract wins and balance sheet strengthening.

On a strong foundation

Unlike most large-cap companies, General Dynamics’ business is more or less evenly distributed among its four operating divisions. This enables the company to effectively deal with fluctuations in the performance of these business units. Given the favorable backlog and strong orders, the company seems headed for a strong 2023.

General Dynamics Corporation Q4 2022 Earnings Call Transcript

Shares of General Dynamics retreated from last month’s record high and fell below its long-term average, and continued to decline after last week’s earnings announcement despite positive results. Prospective investors, however, may not want to ignore experts’ positive outlook on its finances, especially its strong cash flow of $4.6 billion at the end of 2022. Also, the rating is correct.

General Dynamics Q4 2022 Revenue Infographic

Pros and cons

Meanwhile, taking a cue from supply chain challenges and labor issues, management issued cautious guidance for 2023, with key numbers falling short of market expectations. Growing demand for security products is expected to partially offset the benefits. Another concern is weakness in the IT segment — which grew in the low single digits in Q4 — and the company expects the slowdown to continue over the next few years. Beyond the short-term challenges, the company’s prospects are encouraging, and there are also long-term investment opportunities.

Chart: Lockheed Martin Q4 2022 Revenue Increases

Explaining guidance for 2023, CEO Phebe Novakovic told analysts last week, “We expect an operating margin of 10.9%, up 20 basis points from 2022. All in the range of $12.60 to $12.65 per fully diluted share. On a quarterly basis, we expect a pattern similar to what we’ve seen in recent years with continued increases in revenue and operating margins throughout the year. As always, this The forecast is purely from operations and it assumes that we only buy enough shares to keep the share count steady to avoid dilution from option exercises.

Q4 effect

Over the years, General Dynamics has maintained strong profitability, with quarterly numbers exceeding the market’s expectations. This reflects steady order growth, which has helped revenues stay close to $10-billion. It was no different in the fourth quarter Revenue and net profit increased in the mid-single digits at $10.9 billion and $3.58 per share, respectively, and topped expectations. Through 2022, the company reduced its debt by $1 billion, returned $2.6 billion to shareholders and invested $1.1 billion in capital expenditures.

GD traded higher throughout the session on Monday, looking slightly better after the recent decline. After a highly volatile 2022, the stock is down 8% so far this year.


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