Morningstar | GD Is Benefiting from Increases In U.S. Defense Spending While Ramping up New Business Jet Programs
After the acquisition of CSRA, which closed during the second quarter of 2018, General Dynamics now operates five segments: aerospace (23% of 2018 sales), combat systems (17%), marine systems (23%), information technology (23%), and mission systems (13%). The CSRA deal roughly doubles the size of its existing IT business currently housed in IS&T. As a result, General Dynamics is now one of the largest IT contractors for the U.S. government.The aerospace segment, which operates Gulfstream business jets, has enjoyed a commanding position in the high end of the business jet market thanks to the G650, but it is facing increasing competition from a resurgent Bombardier, which recently began delivering the Global 7500. We think Gulfstream business jet deliveries have found a bottom and the unit will continue the growth it registered in 2018. Gulfstream's 2,000-plus fleet of installed aircraft will also provide recurring services revenue, and the 2018 acquisition of Hawker Pacific by the company's Jet Aviation subsidiary is evidence that the company is further building out its services capabilities. Although business jet margins will contract in 2019, we think the firm will maintain industry-leading margins even as it transitions to the G500 and G600 jets.General Dynamics' ground vehicle business, combat systems, is poised for significant growth thanks to international work. In addition, the U.S. defense budget is returning to growth, and we believe that the U.S. Army will begin a long delayed vehicle modernization program. Marine systems operates in a duopoly for large U.S. Navy ships and submarines and the Columbia program should drive growth and provide near-term cash flows thanks to advances. General Dynamics' entrenched competitive position in shipbuilding and ground combat vehicles, coupled with its Gulfstream brand, underpins our wide moat rating for the firm. We also continue to appreciate management’s focus on operational efficiency. Despite the solid management team and wide moat, we think the logic underpinning General Dynamics' portfolio of businesses is changing in the wake of the CSRA acquisition and a broader, strategic shake-up may be in the cards.General Dynamics is an aerospace and defense company. The company has five operating segments: Aerospace, which provides a family of Gulfstream aircraft and services for business aircraft produced by Gulfstream and other original equipment manufacturers; Combat Systems, which provides combat vehicles, weapons systems and munitions; Information Technology, which provides information technology (IT) services, IT infrastructure modernization and professional services; Mission Systems, which provides mission-critical products and systems; and Marine Systems, which designs and builds nuclear-powered submarines, surface combatants, and auxiliary and combat-logistics ships.
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