General Dynamics’ competitive advantage
General Dynamics (GD) offers a diverse range of products like ships, tanks, submarines, and information technology to business jets. The company’s wide range helps ensure the superiority of the armed forces, giving it a superior position with the US Navy and armed forces.
It also helps put the company in an enviable position—even at a time when other companies are suffering due to budget cuts. You can see this struggle in the chart below. General Dynamics has a higher profit margin than Lockheed Martin (LMT) and Northrop Grumman (NOC), but lower than L-3 Communications (LLL). All these companies are part of the PowerShares Aerospace and Defense ETF (PPA).
The company’s business jets division, Gulfstream, has a 60% market share globally and also has service locations all over the world. The start-up costs of entering producing business jets or nuclear submarines are prohibitive. They’re a huge entry barrier, limiting competition.
General Dynamics holds a number of patents that make it one of the most innovative companies, giving GD an edge over its competitors. The company also has one of the strongest balance sheets, with a debt-to-equity ratio of 0.34, providing ample flexibility.
So, in the coming years, when defense spending cuts ease, General Dynamics should have a huge advantage from its diverse product range, robust aerospace business, and operational focus that will power the firm’s return on invested capital well above its cost of capital.
Series of dynamic leaders
General Dynamics had seen many unconventional leaders who have taken the company to new heights. The company’s founders, Bill Anders and James Mellor, focused on creating intrinsic value rather than increasing the company’s revenues at any cost. They shedded non-core assets and focused on business units with greater profitability and margin expansion. Later on, Nick Chabraja followed a strategy of increasing revenue and growth. These leaders also repurchased the company’s shares when they traded at a discount to their intrinsic value.
The company’s current head, Phebe Novakovic, is also said to be a diligent leader. She’s expected to bring the company back on track after Jay Johnson’s less-than-fruitful tenure.
In the next article in this series, we’ll take a look at the company’s backlog.