(Reuters) - General Dynamics Corp on Wednesday forecast 2019 profits lower than analysts estimated and said margins in its critical business jet unit would not improve substantially until 2020, sending shares down nearly 4 percent.
The U.S. aerospace and defense company said the cost of ramping up production of next-generation Gulfstream business jets has sapped profits in its highest margin unit, overshadowing a strong fourth-quarter performance, led by information technology services.
Its shares rose 4 percent after it reported results but reversed course after company executives discussed its outlook during a conference call with analysts.
The Falls Church, Virginia-based company forecast 2019 earnings in the range of $11.60 to $11.70 per share, below the average analyst estimate of $12, according to data from Refinitiv Eikon.
Margins at the aerospace unit, the company’s most profitable, fell to 14.1 percent during the quarter, compared with 17 percent a year ago, pulling down the overall margins as well.
The company will continue to ramp up business jet production in the first and second quarters, Chief Executive Officer Phebe Novakovic said on the call. She predicted earnings and margins at the unit would improve in 2020.
Revenue from the business jet unit rose 36.4 percent to $2.7 billion as jet deliveries, another important metric, increased to 42 from 30 in the same quarter a year ago.
Management estimated the unit would have 2019 revenue of $9.7 billion, up $1.2 billion over 2018, on 145 deliveries, but margins in 2019 would be 15.5 percent compared with 17.6 percent in 2018.
Payments for armored land vehicles going to Saudi Arabia also slowed during the quarter. “Our payment issue got caught up in a larger, international political issue,” Novakovic said.
General Dynamics is making the vehicles in Ottawa, Canada, but political opponents, citing the killing of Saudi journalist Jamal Khashoggi and Saudi Arabia’s involvement in the Yemen war, insisted Canada’s government scrap the deal negotiated by the previous Conservative government.
Novakovic said “that will resolve. It’s a timing issue and we’re quite comfortable and quite confident.”
Total operating margins for the quarter were 11.8 percent, down from 12.8 percent last year. Operating margins measure how much profit a company makes on a dollar of sales.
Net earnings rose to $909 million, or $3.07 per share, from $636 million, or $2.10 per share, a year earlier.
Analysts, on average, expected a profit of $2.99 per share, according to Refinitiv data.
Total revenue jumped 25.4 percent to $10.38 billion, beating estimates of $10.36 billion.
The stock fell 3.6 percent to $169.66 in afternoon trading.
Reporting by Sanjana Shivdas in Bengaluru and Mike Stone in Washington; Editing by Shinjini Ganguli and Jeffrey Benkoe