General Dynamics Corp (NYSE:GD)

Based upon historical earnings, I think this stock should be trading around $104.55 using 5 years discounted cash flows. This yeilds a safety margin of 36%.

War with Iran

My recommendation for a stable cash company would be General Dynamics (NYSE: GD), which is getting negative press related to politics, but has solid long-term appeal. General Dynamics is a key military contractor and operates in segments such as tanks, munitions, submarines, military communications, and aerospace via its Gulfstream brand. I am not worried about the political hammer on defense, albeit a negative at the margin. The growth rate will remain positive even if the slope flattens out on budget cutbacks. With this company you get very stable cash flows, but my favorite part of the company is the upside the Gulfstream brand provides. Time is a critical resource for the super wealthy and business jets should have strong global demand going forward as the rising elite seek to maximize the one resource they can’t buy more of. The valuation story is compelling with a FCF yield of 10%, twice the level of Comcast and a price-to-earnings ratio of 9x

"The chief executive of General Dynamics Corp. (GD), Jay Johnson, says a declining defense budget in Washington could lead to acquisition opportunities for his company, Reuters reports on its website Sunday. He also said the company would "generate considerable earnings and cash in the defense space," according to the report. Demand from emerging markets was pushing growth in the company's commercial-aerospace division as well, he said. Full story at http://www.reuters.com/article/2011/12/11/us-generaldynamics-idUSTRE7BA0RR20111211".

Pressure from reduced US government and military spending, as well as pensions that need to be funded by the company instead of the government contracts, plus an acquisition strategy by the CEO, will put pressure on Free Cash Flow and/or increase debt. This will reduce the stock price over the next few years.

12/10

Here's a fool.com piece I wrote about General Dynamics:

http://www.fool.com/investing/general/2011/11/26/the-hidden-dividend-stock-that-buffett-just-bought.aspx?source=itxsitmot0000001&lidx=3

The Hidden Dividend Stock That Berkshire Just Bought
Brendan Byrnes
November 26, 2011

Warren Buffett, the so-called Oracle of Omaha, knows a thing or two about investing. That's why it was huge news when Buffett announced last week that his company, Berkshire Hathaway (NYSE: BRK-B ) , had purchased a total of 5.5% of IBM (NYSE: IBM ) , an investment worth $10.7 billion.

The headlines were predictable. "Buffett Changes His Philosophy, Buys Tech Stock." "Should You Follow Buffett into IBM?"

But lost in the IBM shuffle were Berkshire's other (albeit smaller) moves. Berkshire also opened new positions in several companies, including Intel (Nasdaq: INTC ) , and Visa (NYSE: V ) . Berkshire purchased 9.3 million Intel shares valued at $199 million and 2.29 million shares of Visa worth $196 million.

However, another such "small" move by Buffett's firm has me the most excited. That's because it's a solid company with a strong dividend. Which Berkshire pick am I putting a bullish CAPScall on today?

Boom!
That'd be General Dynamics (NYSE: GD ) . Berkshire has purchased 3.1 million shares of General Dynamics since March for $174 million. General Dynamics is a well-established defense contractor that's been around since 1899 and pays a solid (and steady) 2.9% dividend. GD is also cheap -- it's currently trading at less than 9 times earnings. Why is that?

Over the past year, GD was beating the S&P 500 before summer began. However, after May, GD trails the S&P fairly substantially and winds up down about 7% so far this year versus the S&P.

It looks as if the market has beaten GD and other defense contractors down because of the possibility of defense cuts. That's been a worry for owners of these stocks for a while, but this summer was when the talk about cutting defense spending really started to heat up. Coincidentally, that's exactly where GD opens a prolonged negative spread against the S&P.

You're nuts!
You might be calling me crazy for giving a defense contractor a thumbs-up right now, especially after the epic (though not unexpected) failure of the congressional "supercommittee" to reach a long-term debt deal triggered up to $600 billion in further defense cuts over 10 years, beginning in 2013.

Time to invoke more Buffett. This time a vintage quote from the man himself: "Be fearful when others are greedy, and greedy when others are fearful."

I believe that the debt crisis and subsequent decline in GD's stock price has created an opportunity for investors to buy GD for cheaper than they otherwise could.

Sure, about 72% of GD's 2010 revenues came from the U.S. government. And that might be a scary stat given the current political climate. But once you compare that number with those of GD's competitors, it gets a little bit more palatable.

Lockheed Martin (NYSE: LMT ) , the world's biggest defense contractor, received 84% of its 2010 revenues from the U.S. government. And Northrop Grumman (NYSE: NOC ) had the U.S. government account for a whopping 92% of its 2010 revenues.

So even though GD does get the majority of its revenues from the government, it is better diversified than many of its big defense-contractor competitors, mainly because of its successful Gulfstream business jet segment.

GD also has many of its defense contracts in areas that are assumed to be less likely to be cut. Through its Electric Boat segment, GD has been the primary builder of submarines for the U.S. Navy for more than 100 years. The company continues to churn out subs at a steady pace, with marine systems accounting for a total of $3.6 billion in revenue for the company in 2010.

Luckily for GD, when you're the No. 1 maker of submarines, you get paid to fix them as well. To that end, GD was recently awarded an additional $429 million as part of a $1.2 billion contract for nuclear-sub support work. It pays to be No. 1.

Foolish bottom line
I believe that fears over defense cuts are overblown, especially for a company like GD. America will always spend whatever it takes to defend itself. Count me among those who don't think we'll see $600 billion cut from defense spending. Moreover, GD is a rock-solid dividend stock with a long track record. Don't expect a 10-bagger here, but trading at less than 9 times earnings, this stock is oversold -- and that's why I'm giving it a thumbs-up in My CAPS portfolio today.

Military-Industrial Complex.

It will continue to underperform against the S&P at least until the election. If Republicans win, I will change this to a green thumb. So, vote Republican... :-)

Ted Combs from Omaha also bought a few shares ;-)

Buffet @3.064 million shares worth $174.3 million.

Slight overperform. Rock-solid company, looks to be underpriced while outperforming its peers financially.

Strong IP, Contracts in a down defense market.

on sale, 23%, pay's steady dividend, defensive

Defense is the only segment of government that is budgeted to _grow_ by 5% next year. As if!
1) With Al Qaeda gone and the middle east taking care of itself, there are no major opponent except the Chinese, and the problem there is our deficit not our armaments. The N Koreans are too crazy to factor in.
2) Who's going to buy our weapons? The Euro is in a mess, and the middle east has other things on its plate besides nation-state affairs. Israel should expect less US aid. Japan remains fiscally weak. Emerging nations have their own fiscal problems.
3) US election is coming up again. People are starting to hate on the tea partiers, but more budget cutting is needed to right the ship. Everything else is already cut to painful levels... what's left? Defense.

Winning lots of contracts. However, I worry about the long-term sustainability of these government contractors...

Good balance sheet.
Low P/E.

Long term hold - predictability

Stable Dividends Screen

$110 price target DDM, relative value, mean reversion of defense spending