General Dynamics Earnings: Generally Magnificent

After more or less "plateauing" for much of the past year, General Dynamics shares look poised to march higher.GD Total Return Price data by YCharts.

There's no two ways about it: General Dynamics just plain dominated the battlefield on earnings this week.

Reporting financial results for its fiscal Q2 2015 on Wednesday, the maker of M1 Abrams main battle tanks, Virginia-class nuclear submarines -- and just about everything else that goes "boom!" -- was pleased to announce that:

  • Sales increased 5.5% in comparison to Q2 2014, hitting $7.9 billion in the quarter.
  • Operating profit margins jumped a full percentage point, to 13.7%.
  • It boosted operating profits 14%, net profits 39%, and earnings per share 44% -- to $2.27 per diluted share.
  • Earnings per share from continuing operations rose "only" 21%, but that was still pretty impressive.

Less impressive was General Dynamics' free cash flow number. Higher capital spending and lower cash from operations in the fiscal second quarter led to a 39% slide in cash profits, to just $503 million.

Even so, when added to a strong free cash flow performance in Q1, General Dynamics is now generating cash profits at the rate of $3.2 billion annually. According to data from S&P Capital IQ, that's nearly 13% more than the $2.9 billion in net income that the company reported earning during the past 12 months.

All together now: How'd they do that?

How they did thatFamously laconic in its earnings releases, General Dynamics mainly stuck to the facts in describing its earnings for last quarter. CEO Phebe Novakovic did go so far as to characterize the quarter as "rock solid." She also highlighted the fact that, whereas other conglomerate companies often use strength in one division to offset weakness in another, at General Dynamics, the company posted "organic growth in all four segments, including the defense segments."

Specifically, operating profits increased in each of Aerospace, Combat Systems, Information Systems & Technology, and Marine Systems. Profit margins expanded in all divisions but one (Marine Systems). And revenues grew in all divisions but one (Combat Systems).

The fact is, with General Dynamics on track to earn billions (and billions) of dollars from armored-vehicle contracts -- such as this one to build $13 billion worth of Light Armored Vehicles for Saudi Arabia -- Combat Systems is one business where we won't need to wait around long to see a rebound. Meanwhile, the company's still in the running to build a fleet of Offshore Patrol Vehicles for the U.S. Coast Guard, a contract that, if they can land it, could be worth a further $12 billion to General Dynamics -- in which case, we needn't worry much about Marine Systems, either.

The upshot for investorsLong story short, if you're beginning to think that, after a 21% rise in General Dynamics' stock price during the past year, GD is starting to look pricey at 17 times earnings, and 15.5 times free cash flow -- wait just a little while longer. As General Dynamics' billions of dollars of backlog -- and soon-to-be-added-to-backlog -- work begins to flow through to revenues and the bottom line, this stock might not look too expensive for much longer.

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