- Wondering if General Dynamics at US$340.76 is priced for its strengths or if there is still value on the table? This article focuses squarely on what that share price might be offering you today.
- The stock has eased back recently, with a 3.0% decline over the past week and 3.1% over the past month, and is down 0.8% year to date, even though the 1 year, 3 year and 5 year returns stand at 24.5%, 57.9% and 105.2% respectively.
- Recent coverage has centered on General Dynamics' position as a major defense and aerospace contractor and how its project pipeline and contract profile fit into longer term expectations for the sector. This context is important when thinking about why the share price has paused after a strong multi year run.
- On Simply Wall St's valuation checks, General Dynamics currently has a valuation score of 4 out of 6. The sections that follow will compare different valuation methods, before finishing with a broader way to think about what the stock might really be worth.
Find out why General Dynamics's 24.5% return over the last year is lagging behind its peers.
Approach 1: General Dynamics Discounted Cash Flow (DCF) Analysis
A Discounted Cash Flow, or DCF, model estimates what a company could be worth by projecting the cash it may generate in the future and then discounting those cash flows back to today’s value.
For General Dynamics, the model used is a 2 Stage Free Cash Flow to Equity approach. It starts with last twelve months free cash flow of about $4.01b. It then uses analyst and extrapolated projections that reach $5.34b in 2030. Between 2026 and 2035, the forecasts and extrapolations in the model range from roughly $4.28b to $6.49b in annual free cash flow, all expressed in $ terms.
After discounting those future cash flows back to today, the DCF output suggests an intrinsic value of about $409.32 per share. Compared with the recent share price of $340.76, this implies General Dynamics screens as roughly 16.7% undervalued on this model.
Result: UNDERVALUED
Our Discounted Cash Flow (DCF) analysis suggests General Dynamics is undervalued by 16.7%. Track this in your watchlist or portfolio, or discover 55 more high quality undervalued stocks.
Approach 2: General Dynamics Price vs Earnings
For profitable companies, the P/E ratio is a useful way to see how much you are paying for each dollar of current earnings. This makes it a common yardstick for large, established businesses like General Dynamics.
What counts as a “normal” P/E depends on how the market views a company’s growth prospects and risk. Higher expected growth and lower perceived risk can justify a higher multiple, while slower growth or higher risk usually means a lower one.
General Dynamics currently trades on a P/E of 21.89x. This sits below the Aerospace & Defense industry average of 38.92x and below the peer group average of 42.86x, so on simple comparisons the stock is priced at a lower multiple than many close comparables.
Simply Wall St’s Fair Ratio is an estimate of what a more suitable P/E might be, here calculated at 27.37x, based on factors such as earnings growth, profit margins, industry, market cap and company specific risks. Because it uses these company level inputs, the Fair Ratio can be more informative than a basic comparison with peers or the broad industry.
Comparing the Fair Ratio of 27.37x with the current P/E of 21.89x suggests General Dynamics may be trading below that modelled level.
Result: UNDERVALUED
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Upgrade Your Decision Making: Choose your General Dynamics Narrative
Earlier it was mentioned that there is an even better way to understand valuation. Narratives on Simply Wall St let you turn your view of General Dynamics into a clear story that links its business drivers to a set of revenue, earnings and margin estimates. It then rolls those into a fair value and compares that fair value with the current share price to help you judge whether it looks attractive or stretched. The narrative updates automatically as fresh news or earnings arrive and, as the analyst price target range from US$327.0 to US$444.0 shows, helps you see how different investors can reasonably arrive at very different conclusions about the same company.
Do you think there's more to the story for General Dynamics? Head over to our Community to see what others are saying!
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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