General Dynamics Squeezed by Budget Cuts

General Dynamics (NYS: GD) , a defense-industry contractor that's highly dependent on U.S. military orders, recently posted disappointing first-quarter numbers as it bore the brunt of the recent Pentagon budget cuts.

However, if you delve a little deeper into the company's aerospace business, as well as its more diverse revenue stream, you might understand why General Dynamics deserves a second look.

A quick look at the quarter
During the quarter, the company's sales decreased to $7.6 billion, a 2.8% fall from the prior-year figure. Net earnings were down 8.7% to $564 million, as well. Barring the effect of special items, this translated into earnings of $1.70 per share, in sync with analyst estimates of $1.69 per share.

Defense-sector doom
General Dynamics has a semi-diversified business with four broad segments -- combat systems, marine systems, information systems and technology, and aerospace -- all of which contribute almost equally to the company's top line. During the quarter, sales of all segments, barring aerospace, took a hit, largely because of the slowdown in defense-related orders and external factors, including the U.S. exiting high-tension areas such as Afghanistan and Iraq.

But the strength in the aerospace segment extends not only to General Dynamics, but to competitors as well. Defense giant Lockheed Martin (NYS: LMT) recently posted shining first-quarter results, helped by an 18% growth in sales in the company's biggest segment: aeronautics. It seems as though the larger defense players, with their more diverse product portfolios, might deal with a spending decline better than the smaller contractors. Either way, the outlook is less than optimal (at least until the presidential elections in November).

Silver lining
General Dynamics' aerospace business, which generates around 21% of its revenue, saw an impressive 20% surge in sales during the quarter, making it the only business unit to show positive growth. This was largely due to increased demand for the company's roomier and longer-range Gulfstream business jets. General Dynamics already has more than 200 orders as part of its backlog for this particular type of aircraft. In fact, the company's aerospace segment has a noteworthy funded backlog of $16.7 billion.

But that's not the only side of its business the company is concentrating on. General Dynamics is also planning to tap the growing demand for armored vehicle units that help protect against roadside bombs. The company agreed to buy smaller rival Force Protection late last year in an attempt to consolidate and enhance its military position.

The Foolish takeaway
General Dynamics is likely to face challenges due to reduced defense spending in the U.S. -- that's a certainty. However, there are companies that show tremendous promise as the 2012 election approaches. Download the Motley Fool report "These Stocks Could Skyrocket After the 2012 Presidential Election" to learn more about these companies. It's only available for a limited time, so click here now.

At the time thisarticle was published Navjot Kaur does not own shares of any of the companies mentioned in this article. The Motley Fool owns shares of Lockheed Martin and General Dynamics. The Motley Fool has a disclosure policy.
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