On Friday, Morgan Stanley upgraded General Dynamics Corp. (NYSE: NYSE:GD) stock from Equalweight to Overweight. The firm also increased the price target to $345 from the previous $293. The upgrade was based on the anticipation of margin growth, fueled by the introduction of the Gulfstream G700 aircraft.
The analyst from Morgan Stanley highlighted the start of a unique period of margin acceleration for General Dynamics. The G700 aircraft, which began deliveries in the second quarter, is expected to be a significant contributor to the company's earnings before interest and taxes (EBIT) expansion through 2026.
Despite the stock's underperformance compared to its peers following the second-quarter results, the analyst sees potential for margin improvement as the program matures.
The early stages of the G700 aircraft's delivery saw margins that fell short of expectations, which is not unusual for new aircraft programs. The analyst predicts that margins will improve as the aircraft moves past initial retrofit work and extended certification costs. This anticipated margin ramp is expected to solidify as the aircraft continues to enter service.
Furthermore, the analyst noted that the introduction of the G700 is likely to reduce risks associated with the upcoming introduction of the G800 aircraft, targeted for the end of the calendar year 2024.
The two aircraft share common features such as the wing, tail, fuselage cross-section, Rolls-Royce (OTC:RYCEY) Pearl 700 turbofans, and a common pilot rating, which could lead to a relatively swift certification process for the G800.
The optimism surrounding General Dynamics' aircraft programs reflects a positive outlook for the company's financial performance in the coming years, with the G700 and G800 expected to play key roles in driving the company's growth.
InvestingPro Insights
Following Morgan Stanley's upgrade of General Dynamics Corp. (NYSE: GD), a closer look at the company's financial metrics and analyst insights from InvestingPro provides a deeper understanding of its investment potential. General Dynamics has demonstrated a strong commitment to shareholders with a track record of raising its dividend for 11 consecutive years, and it has maintained dividend payments for 46 consecutive years, underscoring its financial stability and reliability as an income-generating investment.
The company's market capitalization stands at $79.78 billion, and while it trades at a relatively high P/E ratio of 22.46, indicating a premium relative to near-term earnings growth, this could reflect the market's confidence in its future prospects, especially with the introduction of the Gulfstream G700 aircraft. Additionally, General Dynamics' revenue growth over the last twelve months was 10.0%, with a notable quarterly revenue growth of 17.97%, pointing to robust financial performance and potential for continued expansion.
InvestingPro Tips suggest that despite some analysts revising their earnings downwards for the upcoming period, the company is expected to remain profitable this year. For investors seeking detailed analytics and additional insights, InvestingPro lists several more tips on General Dynamics, available at InvestingPro.
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