Is General Dynamics (GD) Pricing Leave Room After Recent Pullback And Strong Long Term Gains

• If you are wondering whether General Dynamics at around US$343 per share still offers value, you are not alone. That is exactly what this article is here to unpack.
• The stock has had a mixed run recently, with a 1.8% decline over the last week and a 5.6% decline over the last month, while the 1 year and 5 year returns of 40.3% and 127.8% keep longer term holders in focus.
• Recent attention on defense spending and geopolitical tensions has kept companies like General Dynamics in the spotlight, as investors weigh how sustained demand for defense and aerospace projects could influence future cash flows. At the same time, market sentiment has shifted more than once this year as investors reassess risk, which helps explain some of the shorter term price moves.
• On our checks, General Dynamics scores a 4 out of 6 valuation score, which suggests parts of the market may be pricing it below some estimates of fair value. Next, we will walk through how different valuation approaches arrive at that view, before finishing with a more complete way to think about what the stock might be worth.

Find out why General Dynamics's 40.3% return over the last year is lagging behind its peers.

Approach 1: General Dynamics Discounted Cash Flow (DCF) Analysis

A Discounted Cash Flow model takes projected future cash flows, then discounts them back to today to estimate what the business might be worth right now. It is essentially asking what those future dollars are worth in today’s terms.

For General Dynamics, the model uses a 2 Stage Free Cash Flow to Equity approach. The latest twelve month free cash flow is about $4.0b, and analysts contribute estimates for several of the early years, with Simply Wall St extrapolating further out to build a full 10 year path. By 2030, free cash flow is projected at $5.3b, based on the mix of analyst inputs and extrapolated growth rates in the model.

Bringing these projected cash flows back to today and adding them up gives an estimated intrinsic value of about $408.27 per share. Compared with the current share price around $343, the DCF output suggests the stock trades at roughly a 16.0% discount to this estimate, which indicates potential undervaluation on this measure.

Result: UNDERVALUED on this DCF measure

Our Discounted Cash Flow (DCF) analysis suggests General Dynamics is undervalued by 16.0%. Track this in your watchlist or portfolio, or discover 53 more high quality undervalued stocks.

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for General Dynamics.

Approach 2: General Dynamics Price vs Earnings

For a profitable company like General Dynamics, the P/E ratio is a useful way to relate what you pay per share to the earnings the business is currently generating. It gives you a quick sense of how many dollars investors are willing to pay for each dollar of earnings.

What counts as a "normal" P/E depends a lot on how the market views growth prospects and risk. Higher growth expectations or lower perceived risk often go with a higher P/E, while slower growth or higher risk usually justifies a lower one.

General Dynamics currently trades on a P/E of 22.01x. That sits below the Aerospace & Defense industry average P/E of about 45.36x and below the peer average of 43.28x. Simply Wall St also calculates a proprietary “Fair Ratio” of 30.07x for General Dynamics, which is the P/E level that aligns with factors such as its earnings profile, industry, profit margin, market cap and risk characteristics.

This Fair Ratio aims to be more tailored than a simple comparison to peers or the broad industry, since it adjusts for company specific traits rather than assuming all defense names deserve the same multiple. Compared with the Fair Ratio of 30.07x, the current P/E of 22.01x suggests the shares trade below that tailored benchmark.

Result: UNDERVALUED

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Upgrade Your Decision Making: Choose your General Dynamics Narrative

Earlier we mentioned that there is an even better way to understand valuation. On Simply Wall St's Community page you can use Narratives to link your view of General Dynamics' story to a financial forecast and a fair value. You can set your own assumptions for future revenue, earnings and margins, then compare that fair value to the current share price. The Narrative updates automatically when new information like news or earnings is added. This means one investor who believes higher defense budgets and a fair value of about US$394.53 make the stock undervalued can sit alongside another who focuses on risks and a bear case nearer US$280, and you can quickly see how your own story compares with both.

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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