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Will Aerospace Unit Hurt General Dynamics' (GD) Q3 Earnings?

Zacks.com logo Zacks.com 10/22/2020

General Dynamics Corporation GD is scheduled to release third-quarter 2020 results on Oct 28, before the opening bell.

A poor show by the company’s Aerospace Unit might have affected its revenues in the to-be-reported quarter.

Let’s take a detailed look at the factors influencing General Dynamics’ third-quarter performance.

Will the Aerospace Segment Again Take a Blow?

Due to the difficulties aggravated by the COVID-19 pandemic, alongside travel restrictions and fairly low aircraft demand, the company's Aerospace segment's third-quarter performance is again likely to receive a major blow. Over the past couple of quarters, General Dynamics has experienced significant disruptions in its production and delivery schedules due to prolonged COVID-19-induced business restrictions and supply-chain issues. As the coronavirus impact is still dominant across the globe, poor performance of the aviation industry is expected to have affected Aerospace unit’s revenues in the third quarter as well.

Consequently, the Zacks Consensus Estimate for General Dynamics’ largest segment’s revenues in the third-quarter is pegged at $2,052 million, implying a 17.8% plunge from revenues reported in the year-ago quarter. Further, the segment’s operating earnings in the third quarter are also likely to decline 26% from the year-ago quarter’s reported figure.

Other Factors Under Consideration

From a positive viewpoint, the company witnessed solid growth in its combat systems and marine systems segments in both the first and second quarter of 2020. This was probably because of the fact that the defense business of the nation remained cushioned to a large extent, backed by government support. So, we expect the third-quarter results to reflect similar trends.

In line with this, the Zacks Consensus Estimate for General Dynamics’ combat segment’s revenues in the third quarter is pegged at $1,801 million, implying a 3.5% rise from revenues reported in the year-ago quarter. The Zacks Consensus Estimate for its marine segment’s revenues implies a 1.3% rise from revenues reported in the year-ago quarter.

Q3 Backlog

General Dynamics has been witnessing a steady flow of orders from both Pentagon and its foreign allies, courtesy of the demand for its varied range of military offerings. Notably, during the third quarter, it secured a handful of multi-million-dollar contracts. This is expected to get reflected in the company's backlog count for the quarter under review.

Q3 Forecast

The revenue drop in the company’s largest business segment is likely to have negatively impacted the overall performance in the to-be-reported quarter. The Zacks Consensus Estimate for third-quarter revenues stands at $9.6 billion, indicating a 1.7% decline from the year-earlier quarter’s reported figure.

Notably, the declining revenue expectations for the third quarter can be projected to have affected the company’s bottom line as well. Moreover, lower IT services volumes in the General Dynamics Information Technology segment have been hurting its quarterly earnings, courtesy of the COVID-19 impacts. This trend is likely to have continued in the soon-to-be-reported quarter as well.

The Zacks Consensus Estimate for the defense giant’s third-quarter earnings is pegged at $2.85 per share, indicating a decline of 9.2% from the prior-year quarter's reported number.

During the second-quarter earnings call, General Dynamics revealed its plans of repaying the remainder of its commercial paper during the third quarter. We can expect such debt repayments to get duly reflected in the company’s cash flow balance in the yet-to-be-reported results.

What the Zacks Model Unveils

Our proven model does not conclusively predict an earnings beat for General Dynamics this earnings season. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat. But that’s not the case here.

General Dynamics has an Earnings ESP of +1.36% and a Zacks Rank #4 (Sell). You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

General Dynamics Corporation Price and EPS Surprise

chart, line chart: General Dynamics Corporation Price and EPS Surprise © Provided by Zacks.com General Dynamics Corporation Price and EPS Surprise

General Dynamics Corporation price-eps-surprise | General Dynamics Corporation Quote

Stocks to Consider

Here are some defense companies you may want to consider, as these have the right combination of elements to post an earnings beat in their upcoming releases:

L3Harris Technologies Inc. LHX has an Earnings ESP of +0.57% and a Zacks Rank #2. The company will announce third-quarter 2020 earnings on Oct 30. You can see the complete list of today’s Zacks #1 Rank stocks here.

Kratos Defense Security Solutions, Inc. KTOS has an Earnings ESP of +33.33% and a Zacks Rank #3. The company is projected to post third-quarter 2020 results soon.

An Upcoming Release

Boeing BA, a Zacks Rank #4 (Sell) company, will release third-quarter results on Oct 28.

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