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Can Submarine Deals Lift General Dynamics' (GD) Q3 Earnings?

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Military shipbuilder General Dynamics Corporation (GD - Free Report) is scheduled to release third-quarter 2017 results on Oct 25, before the opening bell.

We believe substantial inflow of military contracts from Pentagon to drive the company’s revenues in the third quarter. However, Aerospace segment is expected to face margin pressure in the second half of the year, which is reflected in third-quarter sales estimate for this unit.

Let’s take a detailed look at the factors influencing General Dynamics’ quarterly results.

String of Contracts to Boost Growth

A scrumptious order flow form Pentagon as well as foreign allies of the United States tend to boost quarterly sales of defense bellwethers and General Dynamics is no exception. In this line, the Zacks Consensus Estimate for the company’s third quarter sales is $7.9 billion, reflecting 2.1% year-over-year growth.

Notably, the significant contract that General Dynamics secured in the third quarter, include a $5.1-billion special incentives contract to complete the design of the Integrated Product and Process Development for the Columbia-class ballistic missile submarines (SSBNs); a modification contract worth $115.3 million for offering additional lead-yard services, development studies and design efforts to support Virginia-class submarines and a contract worth $310.6 million to design, develop and integrate several engineering changes into the Abrams M1A2 SEP V3.

The company also won a $341.2-million modification contract to exercise the option for design agent, planning yard, engineering and technical support for in-service nuclear submarines and another modification contract worth $109.2 million for procuring Hydra rockets.

Being one of the top-notch submarine contractors in the nation, such contracts are expected to bolster the company’s Marine Systems segment’s growth. Evidently, our consensus estimate for the Marine Systems’ sales stands at $2,068 million, up 0.2% annually.

Will Aerospace Segment be a Spoilsport?

During second-quarter earnings call, General Dynamics’ management expressed concern about the Aerospace segment’s sales growth in the second half of the year, citing unfavorable margins to play a spoilsport. In line with this expectation, our consensus estimate for the segment is pegged at $2,039 million, reflecting a year-over-year decline of 9.2%. Operating earnings for this business unit is also projected to reduce by 10.4% to $398 million, per our consensus estimate.

Although the company continues to boast a strong forte in the Gulfstream business, which exhibits a strong pipeline growth, a substantial downtick on the margin may hamper this segment’s overall third-quarter growth. 

Other Factors at Play

Segment-wise, other two business units of General Dynamics indicate higher annual sales growth, considering the respective Zacks Consensus estimate.

On the flip side, the company’s services business is expected to deliver weak performance due to slow execution of programs in several civilian agencies, owing to uncertainty and, in some cases, reduction in funding levels.

For the to-be-reported quarter, our consensus estimate for General Dynamics’ earnings is pegged at $2.43 per share, down 2.14% year over year.

Why a Likely Positive Surprise?

Our proven model shows that General Dynamics is likely to beat earnings this quarter. Notably, a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. General Dynamics possess both of these attributes, as mentioned below:

Zacks ESP: General Dynamics has an Earnings ESP of +0.37%. This is because the Most Accurate estimate is pegged at $2.44, higher than the Zacks Consensus Estimate of $2.43. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: General Dynamics currently carries a Zacks Rank #3, which along with a positive earnings ESP hints at possible surprise prediction.

Meanwhile, we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks that Warrant a Look

Here are some other defense companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:

Huntington Ingalls Industries, Inc. HII is expected to report third-quarter 2017 results on Nov 8. The company has an Earnings ESP of +2.04% and a Zacks Rank #2.

Leidos Holdings, Inc. LDOS is expected to report third-quarter 2017 results on Nov 2. The company has an Earnings ESP of +3.75% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Recent Peer Release

Textron Inc. TXT recently reported third-quarter 2017 adjusted earnings from continuing operations of 65 cents per share, beating the Zacks Consensus Estimate of 62 cents by 4.8%. Total revenues in the quarter were $3.48 billion, which missed the Zacks Consensus Estimate of $3.54 billion by 1.5%.

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