General Dynamics (GD): Buy, Sell, or Hold Post Q4 Earnings?

General Dynamics has had an impressive run over the past six months as its shares have beaten the S&P 500 by 7.7%. The stock now trades at $365.83, marking a 13.5% gain. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.

Is now the time to buy General Dynamics, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.

Why Is General Dynamics Not Exciting?

We’re glad investors have benefited from the price increase, but we're cautious about General Dynamics. Here are three reasons why GD doesn't excite us and a stock we'd rather own.

1. Long-Term Revenue Growth Disappoints

A company’s long-term sales performance can indicate its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Regrettably, General Dynamics’s sales grew at a mediocre 6.7% compounded annual growth rate over the last five years. This fell short of our benchmark for the industrials sector.

2. Projected Revenue Growth Is Slim

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect General Dynamics’s revenue to rise by 4.1%, a deceleration versus its 6.7% annualized growth for the past five years. This projection is underwhelming and suggests its products and services will face some demand challenges.

3. EPS Barely Growing

Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.

General Dynamics’s unimpressive 7% annual EPS growth over the last five years aligns with its revenue performance. This tells us it maintained its per-share profitability as it expanded.

Final Judgment

General Dynamics isn’t a terrible business, but it isn’t one of our picks. With its shares topping the market in recent months, the stock trades at 22.4× forward P/E (or $365.83 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We're fairly confident there are better stocks to buy right now. We’d recommend looking at one of our all-time favorite software stocks.

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