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Downgrade of General Dynamics reflects weakness in defense sector

The performance of two key segments of General Dynamics (GD) – combat systems and mission systems – was essentially flat in the December quarter. Though its impact was offset by the strong revenue growth in other divisions, the underlying weakness was evident in the guidance issued by the company’s CEO during the post-earnings presentation.

The Aerospace giant’s shares, which were regaining strength after slipping to a multi-year low a few weeks ago, suffered a fresh jolt before stabilizing in the following days. The stock has been trading almost flat since then.

Though research firm Credit Suisse slashed its rating on the company on Friday, citing the unimpressive guidance, the action did not have any noticeable impact on the stock. The analyst downgraded the company to neutral from outperform and lowered the price target to $184 from $190.

Though Credit Suisse slashed its rating on the company on Friday, it did not have any noticeable impact on the stock

Credit Suisse said the defense contractor might find it difficult to keep pace with its peers under the present circumstances, which according to the brokerage firm marks the ‘greatest peacetime defense upcycle’ in recent times.

The 3.5% revenue growth forecast for the current fiscal year by the company, which manufactures the iconic F-16 fighter jet, falls short of the average estimate for the whole sector. Worse, General Dynamics’ long-term revenue growth forecast, which the company currently pegs at 4.6%, is the lowest for the industry.

Also see: General Dynamics Q4 2018 Earnings Conference Call Transcript

The analyst also raised concerns about the recent acquisition of software firm CSRA by General Dynamics, as the valuation at the time of closing the $9.75-billion deal was too high. Also, the transaction is unlikely to become accretive to the company’s earnings in the near term. According to the bank, the company could have invested that amount in a more effective manner and earned better returns.

Earnings: Aerospace, IT help General Dynamics beat Q4 estimates

Among the other defense firms, Northrop Grumman (NOC) had issued lower than expected full-year guidance while publishing its Q4 earnings reports. Lockheed Martin (LMT) was also cautious while releasing its outlook for 2019, which underscores the muted outlook for the sector.

Over the past twelve months, General Dynamics’ stock lost about 22%. It had a positive start to 2019 and gained 12% so far this year.


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