Strategy: General Dynamics Corp.'s new management appears intent on a strategy that relies less on risky acquisitions and focuses on improving performance in existing businesses. Previously General Dynamics was active in acquisitions that would reinforce it in its four lines of business—information technology, ground combat systems, shipbuilding and aerospace. The expansion drive has more than quadrupled the size of the company over the past 12 years and increased its earnings to an even greater degree until the dismal 2012 results. That accounts for the shift towards focusing on performance.
Strengths: General Dynamics has a very strong, well-respected management team. General Dynamic’s record has been so strong that even executives of competitive firms see it as one of the best-managed companies in the US defense industry. The company continues to have a strong balance sheet and strong cash flows.
General Dynamics has an extremely strong position in cyber security due past acquisitions and now derives more revenues from the growing area than any other major defense company. General Dynamics is the world’s largest manufacturer of ground combat systems. General Dynamics’ business jet position in the high end of the market gives the company greater pricing power and higher profit margins than its competitors. Particularly the G450/G550/G650 market niches appear less vulnerable to economic slowdowns than its lower end G150/G250 offerings.
General Dynamics has an unrivaled reputation in business jet services at Gulfstream, consistently beating competitors in industry rankings by customers.
Weaknesses: The company's acqui-sition processes are faulty, leading the company to overpay for businesses. Pressure on the defense budget will hit three of the company's four businesses--ground combat systems, shipbuilding and aerospace. Profitability in shipbuilding remains low compared to other sectors.
Opportunities: Demand for the company's business jets has been booming, giving the company an impressive backlog that should help cushion any downturn. Gulfstream is trying to take advantage of that demand by increasing production cautiously.
It is also adding to its product mix with the $58.5 million G650 at the high end of the market, deliveries of which have begun.
Gulfstream's strong market and high profit margins offer the prospect of growth for the company at a time when its defense sales will be under pressure. Profit margins promise to increase as deliveries of the G650 and the G280 increase and the production line comes down the learning curve on the production.
The purchase of Jet Aviation gives General Dynamics the ability to better support its aircraft sales. It can also offer a broader range of business jet services such as aircraft management and fixed-base operations.
Continued expansion of the company's network centric business offers the potential for growth and to shake the company's image as a producer of weapon systems that may not be that relevant to the future battlefield. Veridian in particular offers tremendous promise for General Dynamics in expanding its opportunities in intelligence work.
In Marine Systems, General Dynamics stands to benefit from the Department of Defense's shift towards more emphasis on projecting power into the Pacific. That could help bolster the US Navy's shipbuilding budget.
Threats: A serious economic downturn is a serious threat to the company. This could lead to cancellations or deferrals of Gulfstream business jet deliveries and lower profit margins. That is a serious issue because Gulfstream is becoming increasingly important for the company's growth and boasts the highest profit margins in the company.
Defense budget cuts could also hurt General Dynamics. Combat Systems has already suffered a major decline in revenues as ground troops are withdrawn from Iraq and Afghanistan. Information technology is also becoming a major target for budget cutting because contracts are on a very short cycle compared to procurement contracts.
Like other major information technology providers to the federal government, General Dynamics faces serious pressure in the business. Aggressive pricing and a shift towards services is cutting profit margins for information technology providers.
General Dynamics has been expanding its network centric business but remains considerably smaller in the area than its four major competitors, Lockheed Martin Corp., Raytheon Co., the Boeing Co., and Northrop Grumman Corp. Other companies including Harris and Lockheed Martin appear to be successfully moving into the area of Army tactical communications, an area that has hitherto been dominated by General Dynamics.
BAE Systems' acquisition of rival United Defense and Armor Holdings gave General Dynamics a major ground combat systems rival in the United States.
European defense cuts have hit Combat Systems hard, representing three-quarters of the 9.5 percent decline in 2012 revenues.
Aerospace sales have been hurt by a trend for OEMs to do more aircraft maintenance work themselves.
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