Wednesday, Credit Suisse upgraded General Dynamics Corp. (GD) shares to Outperform from Neutral and increased its price target to $74 from $70.
Analyst Spingarn finds GD defense programs on balance to have a fairly positive outlook, pointing to a stable forecast for GD's defense segments through 2012. Meanwhile, the analyst concluded that GD's higher-end product line should fare better than peers in the evolving biz jet market.
Based on third quarter EPS, the analyst thinks Aerospace troughed in sales and margins in third quarter, and he sees sequential improvement in earnings and orders going forward, with first signs likely from the newly expanded, via the Jet Aviation acquisition, aftermarket business in 2010.
While GD has moved strongly off its March low, the analyst thinks the market has yet to factor stability in its defense programs in 2011-2012 coupled with potential strong recovery growth in Aerospace in that time frame. The analyst thinks GD's modest 4% war exposure can keep defense earnings intact and historical analysis shows a 10x multiple, same as peers, is warranted for this segment.
The projected Aerospace growth warrants a P/E multiple in-line with commercial names, the analyst apply a 15x multiple on his expectations of trough 2009 EPS. The consolidated multiple of 11x, applied against the analyst's calendar 2010 EPS forecast of $6.72 yields a price target of $74, 18% upside, up from $70, when he used 12.5x for Aero.
The analyst said that positive economic data, and seq. improvement in Aero earnings / orders are future share catalysts. Defense contract announcements, along with the February FY-11 budget release should bring greater comfort for the defense outlook. Risks include a deferred economic recovery and greater-than-expected impact from war withdrawal on Combat Systems, or other unanticipated program cuts.
Currently, GD is up $2.54 or 4.06% and trading at $65.09.
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