UPDATE 2-General Dynamics shares rise on buyback pledge

Wed Jan 22, 2014 2:56pm EST

By Andrea Shalal-Esa

WASHINGTON Jan 22 (Reuters) - General Dynamics Corp shares rose more than 5 percent on Wednesday after the maker of Gulfstream business jets and Navy ships posted higher-than-expected quarterly results, and pledged to buy back 11.4 million shares in the first quarter.

Chief Executive Phebe Novakovic, marking her first year on the job, forecast lower earnings and revenues in 2014 but said there was more upside than downside on revenues and that the company would likely adjust its earnings guidance upward in the second quarter after the share repurchase.

The news sent the company's shares as high as $100.55 on the New York Stock Exchange, although they slipped to trade at $98.90 by early afternoon, up 3.8 percent from Tuesday.

"Phebe Novakovic likes to underpromise and overdeliver," said Christian Mayes, an analyst with Edward Jones Equity Research, who has a buy rating on the stock. "With the company targeting to return nearly all free cash flow to shareholders in 2014 through dividends and buybacks, investors are happy."

The Falls Church, Virginia-based company reported earnings of $624 million, or $1.76 per share, from continuing operations in the fourth quarter of 2013, on revenue of $8.1 billion.

Analysts polled by Thomson Reuters I/B/E/S had expected earnings from continuing operations of $615 million, or $1.75 per share, on revenue of $7.99 billion.

For the full year, General Dynamics posted earnings from continuing operations of $2.5 billion, or $7.03 per share, while sales edged lower from a year earlier to $31.2 billion.

Fourth quarter net profit was $495 million, or $1.40 per share, including a $129 million loss in discontinued operations related to the pending settlement of a long-standing dispute over the A-12 stealth plane, which was canceled in 1991.

The company had reported a $2.1 billion loss and lower-than-expected revenue in the fourth quarter of 2012. At the time, Novakovic vowed to improve operating margins and develop more realistic operating plans.

The company's fourth quarter report showed strong improvements in operating margins in all four of the company's sectors: aerospace, combat systems, marine systems and information systems and technology.

Its quarterly operating margin was 11.4 percent versus a negative margin of 23.5 percent a year earlier. Operating margins rose to 11.8 percent in 2013 from 2.6 percent in 2012.

Novakovic told analysts on an earnings call that the company remained focused on improving operating margins in 2014 and expected international sales to account for 30 percent of revenue, up from 25 percent in 2013.

She said the combat systems business expected to land a $1.2 billion foreign order in the first quarter that had initially been expected last quarter. If the deal slipped again, revenues in that division could erode further, she said, adding that she was confident that it would be booked soon.

She said Gulfstream business jets remained the primary growth engine for earnings and revenue across the company, but other business areas were producing steady revenues and profit.

"Only two of our 11 businesses are in a significant down cycle," Novakovic said, citing the company's land systems and information systems business with the U.S. Army, which has been hard hit by U.S. military spending reductions.

She said the company was reducing its exposure to Army orders and the other units were "earnings and cash powerhouses."

"We're getting close to the bottom," Novakovic said, adding that a two-year budget deal reached by Congress had given the company a greater sense of stability in funding.

General Dynamics said its backlog totaled $46 billion at the end of the year, boosted by significant orders for Gulfstream jets, additional double V-hulled Stryker combat vehicles and early work on new Navy submarines.

The backlog totaled $51.3 billion at the end of 2012.

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