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GD Buys Applied Physical Sciences

BA GD LMT

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General Dynamics Corporation (GD - Analyst Report) has acquired Applied Physical Sciences Corporation in a cash deal for an undisclosed price.

Applied Physical Sciences is a provider of applied research and development services, and will complement the engineering programs of General Dynamics Electric Boat, a wholly owned subsidiary of General Dynamics.

Applied Physical Sciences offers research, development, engineering and prototyping services to government and commercial customers in the areas of acoustics, signal processing, marine hydrodynamics and electromagnetics. It is an industry leader in the fields of directional underwater transducers, maritime and sensing and communication systems, and special purpose underwater devices for government laboratories, universities and industry. The company has 95 employees.

Applied Physical Sciences' headquarters and manufacturing facility are located in Groton, Connecticut. It also has offices in Lexington, Massachusetts; Arlington and Suffolk, Virginia; and San Diego.

Headquartered in Falls Church, Virginia, General Dynamics engages in mission-critical information systems and technologies; land and expeditionary combat vehicles, armaments and munitions; shipbuilding and marine systems; and business aviation. The company operates through four segments: Information Systems & Technology (IS&T), Combat Systems, Marine Systems, and Aerospace.

General Dynamics was the third largest U.S. defense contractor in terms of revenue in fiscal 2011, after The Boeing Company (BA - Analyst Report) and Lockheed Martin Corporation (LMT - Analyst Report). The company is one of two contractors equipped to build nuclear-powered submarines in the U.S.

Looking forward, key growth drivers for General Dynamics include the improving business jet market, its stable business of U.S. military vehicles, a backlog (though declining) of $51.5 billion, an ongoing share repurchase program and strong cash flow generation. However, the company is largely tied to the U.S. defense budget, where the threat of budget cut is high. Also, we have turned slightly cautious about the company’s steadily dropping order backlog, and risks related to the execution of key projects.

General Dynamics’ total order backlog decreased to $51.5 billion at the end of the first nine months of 2012 from $59.6 billion at fiscal-end 2010. Going forward, the U.S. economic fundamentals are basically being kept on a leash as the Euro-crisis continues to cast its spell over the financial markets, keeping risks of further cutbacks in future defense budgets at a high level. Our apprehension is fueled by $15 trillion of national debt and an unemployment rate hovering around 7.9% which would lead to the Budget Control Act’s dictum of automatic cutbacks across the board going forward.

Going by the pulse of the economy and the pros and cons, we prefer to maintain our long-term Neutral recommendation on the stock. Moreover, General Dynamics holds a Zacks #3 Rank that translates into a short-term Hold rating.

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