Tuesday, October 9, 2012

Analysis of General Dynamics

After having sold SPLS and boosting my cash position, I've been screening stocks, looking for another great pick for the portfolio.   As I posted in my previous blog, I screened the small cap 600, the mid cap 400, and the large cap 100.  The results from those screens yielded some interesting companies, but besides AAPL and QCOM, many were financial, apparel, or airlines.  Since I own AAPL, and I am heavily weighted already in technology (MSFT, CSCO, INTC), I decided to pass on QCOM.

I then went back to the David Fish CCC lists.  I own several of the top Aristocrats and Champions, so I screened Contenders next.  Here is the result:

I own of few these already (TEVA, MSFT), several are similar to existing holdings NSC = CSX, CAT = CMI, and the others had some warts (BBY = value trap).  GD caught my attention with a low PE, a nice yield, and respectable EYE ratio.  Here are some FASTGraphs on GD:

Nicely undervalued vs. its historical PE (15 years).  Historical growth in EPS is 11.6%.   Here is a graph of price vs. normal PE for the past six years:

Still below fair value by around 9%.  Even though the stock took a big hit in 2008/2009, earnings continued to grow at 6.6%, giving us the undervaluation today.  Looking at yield, nice at 3.1%, with a good dividend track record:

GD has a nice track record of increasing dividends.  CAGR for the last 5 years of dividend growth is a very healthy 10.72%, and the payout ratio has remained around 25% or lower consistently.  An investment in GD 15 years ago handily outperformed the S&P by 6.3% annually.

Price to sales is at historic lows:

Looking at future earnings estimates, this year and next forecast by the company.  Out years a consensus of analysts following the stock:

This reinforces today's undervaluation, and while the 7% future growth is not all that exciting, I think this could change depending on the upcoming election.  GD has managed to sustain growth during 4 years of the Obama administration, and I suspect future growth estimates assume the current administration stays in power.  This could be viewed as a worse case future growth scenario.  Low debt, good payout ratio, nice yield and annual dividend increases all point to a well managed firm.  I ordinary would not like a stock that derives over 60% of its revenue from one customer (US Government), but because its the government, I don't view that nearly as risky as a major corporate customer.

While I'm skeptical of analyst opinions, I like to at least see what they are saying.  Here is a summary my Fidelity account (published without permission, hope this is legal :) :

GD is trading down today, I'm going to initiate a position, and build it over the coming few weeks.



  1. Hey Chump,

    Funny thing, I bought GD today too... or should I say I added! :)
    They have somewhere of $10B backlog order, they are well positioned for the future.

    You took CSX off the list? I don't see it, anyway it's like you said... pretty much the same then NSC. I like them both.

    Have you look at DOV, nice one too.

    Did you finally look at GMCR and QCOR?


  2. Grox, bon soir. Great minds think alike I suppose :) I started a position in GD, and added to my DOV position. The stocks shown above are from a screen I ran, not my current holdings. If you view one of my earlier update to portfolio posts, you can see all my current holdings, though GD won't show up until this weekend's update.

    I still like and own CSX.

    GMCR looks interesting. I love coffee, and we use a Keurig single serve in our house. But the machine recently broke down, so I'm mad at them (need my caffeine). I like the stock at these prices, but dislike the fact that they don't pay any dividend. Now that Starbucks is getting into their business, this is also a worry, but not a huge one. I'm still thinking about this one; but it may be a bit trendy for me.

    QCOR looks very undervalued, and has a nice yield of 3.8%. However, it seems the whole company is riding on their Acthar drug with mixed reports in the news. Seems a bit binary for me, probably a little too risky for my portfolio. I'd be more inclined to go with the coffee!