Morningstar | GD's businesses are poised for revenue growth but margins will contract in 2018.
Following the acquisition of CSRA, which closed during the second quarter of 2018, General Dynamics will operate five segments: aerospace (24% of pro forma 2018 sales), combat systems (16%), marine systems (23%), information technology (25%), and mission systems (12%). The CSRA deal roughly doubles the size of its existing IT business currently housed in IS&T. As a result, it's now one of the largest IT contractors for the U.S. government.The aerospace segment, which operates the Gulfstream, enjoys a commanding position in the high end of the business jet market and is well-positioned to continue leading the market given Bombardier's challenges and the recent cancellation of Dassault's Falcon 5X jet. We think Gulfstream business jet deliveries have found a bottom and the aerospace segment will begin growing again. Its 2,000-plus fleet of aircraft will also provide recurring services revenue, and the 2018 acquisition of Hawker Pacific by the company's Jet Aviation subsidiary is further building out services capabilities. Although business jet margins will contract in 2018, we're convinced that the firm can maintain industry-leading margins even as it transitions to the new G500 and G600 jets. General Dynamics' ground vehicle business, combat systems, is poised for significant revenue increases 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, while also providing near-term cash flows thanks to customer advances. GD's entrenched competitive position in shipbuilding and ground combat vehicles, coupled with its industry-leading business jet brand, Gulfstream, will generate both top- and bottom-line growth for this wide-moat company over the long-term. Moreover, we continue to appreciate management’s focus on operational efficiency. That said, we are a bit concerned about the CSRA deal, given that it channels resources into a lower-margin, lower-growth area of the portfolio.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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