General Dynamics investment note with government sales breakdown

Company Description: Dover is a diversified, global manufacturer of industrial products. It comprises more than 30 independent companies that operate in four segments: Refrigeration & Food Equipment, Fluids, Energy, and Engineered Systems. General Dynamics (GD) Ronald Epstein +1 646 855 5695 Research Analyst, MLPF&S Buy, PO $200 1Q investment thesis General Dynamics is a defensive large cap value stock with potential cyclical growth. The company has a history of annual dividend increases with a dividend yield of 1.7%. Concerns about weakening demand for Gulfstream business jets in General Dynamic’s Aerospace segment have weighed down sentiment. However, using a sum-of-the-parts analysis that values GD’s defense businesses in line with the pure play defense average, this would imply that GD’s Aerospace segment is trading at a significant discount to the market at 12x P/E multiple on 2018E earnings. Considering the strength in Gulfstream’s product portfolio and margin performance, we would expect Aerospace to trade at least at 18x P/E multiple on 2018E earnings. Table 1: General Dynamics key stock data Industry Aerospace & Defense Market Cap (mn) $57,215 Price $173.21 P/E (2017)* 17.9x % of sell-side rated Buy 76.2% Short interest % of float 1.02% Source: Bloomberg and BofA Merrill Lynch Global Research estimates Gov't Legislation: 56% of sales are from the US government General Dynamics’ primary customer is the US Department of Defense, which accounted for 47% of total sales in 2015. The remaining 9% are to other non-DoD US government agencies like the intelligence community. For the military, which is a defensive sector, GD is engaged in engineering, manufacturing, and support of land and expeditionary combat vehicles and systems, armaments, munitions, and shipbuilding and marine systems. Major products include Virginia-class nuclear-powered submarine and Ohio class ballistic nuclear submarine replacement, Arleigh Burke-class Aegis destroyer, Abrams M1A2 tank, Stryker 8-wheeled assault vehicle, medium-caliber munitions and gun systems, tactical and strategic mission systems. The company also provides information systems and technologies. Disruptor: Gulfstream G650 has unrivaled performance in the most profitable business jet market segment There is no direct competitor aircraft currently in service in the market to match the performance of the Gulfstream G650/650ER. The G650ER has a range of 7,500 nautical miles at Mach 0.85, but can fly faster at Mach 0.90 with a range of 6,400 nautical miles. The Dassault Falcon 8X has a range of only 6,450 nautical miles. Meanwhile, Bombardier’s response to the G650 has been delayed another year with the entry into service of the Global 7000 (range of 7,300 nautical miles) in 2H18. Gulfstream book-to- bill in 3Q16 was 1:1 ona dollar value basis and 1.2:1 on an aircraft unit basis. In our view, market share gains in a soft demand environment could provide Gulfstream a solid foundation to bridge the Gulfstream G450/550 to the G500/600. Bankof America Merrill Lynch Top 10 US Ideas Quarterly | 03 January 2017 5 HOUSE_OVERSIGHT_014626