General Dynamics Corporation Rumbles Forward on Earnings Beat

General Dynamics stock has had a lot of ups and downs this year.GD data by YCharts.

"Slow and steady wins the race," goes one old saying, and General Dynamics proved it true this week as modest sales and earnings growth sent the defense contractor's stock up just 1.6%.

Releasing financial results for its fiscal Q3 2015 on Wednesday, the maker of M1 Abrams main battle tanks, Virginia-class nuclear submarines -- and just about everything else that goes "boom!" reported:

3.1% sales growth to $7.99 billion for the quarter, about $150 million more than analysts had predicted.
Operating profit margins stayed flat at 12.9%.
But a 4% decrease in the number of shares outstanding concentrated earnings among fewer shares.
On the bottom line, this added up to a modest 5.3% increase in net profits, and a 10.7% boost to earnings per share -- which at $2.28 diluted, exceeded analyst estimates by a good $0.15.

Where we stand todayCEO Phebe Novakovic described the quarter's results as "solid" and promised to "maintain this momentum" going forward. And if "momentum" seems a bit of an ambitious term to describe what's largely been low-to-mid-single digit growth, consider:

So far this year, the first three quarters of 2015 have seen General Dynamics grow its revenues only 5.2% in comparison with the first three quarters of 2014. But operating earnings are up 11.3%, net profits are up 20.1%, and net earnings per diluted share are -- thanks to the buybacks -- up an astounding 25.1% year over year.

ValuationThat all actually is pretty impressive. But here's something that's not so impressive: actual profits. According to management, free cash flow generated in the third quarter came to just $652 million, which is right in line with the pace of FCF generated so far this year -- $1.8 billion over three quarters. That's barely half the $3.5 billion in cash profit that General Dynamics had churned out by this time, last year -- a 48% year-over-year decrease.

Valued on this free cash flow, and projecting YTD results out through the end of this year at the present run-rate, General Dynamics seems on course to generate about $2.4 billion in free cash flow this year. This implies a valuation of roughly 20 times free cash flow on the stock -- which would suggest the stock is expensive given the company's size and future growth expectations.

Granted, if General Dynamics can continue growing earnings at 25% annually, that would be more than fast enough to justify the stock's high price. But there's a (monetary) limit to how long the company can boost earnings with stock buybacks, and in the long run, analysts who follow the stock on S&P Capital IQ quote a projected long-term growth rate of less than half that rate -- just 10%. If this is the best we can expect from GD going forward, GD's stock appears to be, at best, modestly overvalued.

Long story short, I'd rather be short General Dynamics than long.

The article General Dynamics Corporation Rumbles Forward on Earnings Beat originally appeared on Fool.com.

Fool contributorRich Smithdoes not own shares of, nor is he short, any company named above. You can find him on our virtual stockpicking service,Motley Fool CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 280 out of more than 75,000 rated members.The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.