General Dynamics Corporation's (NYSE:GD) Intrinsic Value Is Potentially 41% Above Its Share Price

Simply Wall St.
31 Mar

Key Insights

  • Using the 2 Stage Free Cash Flow to Equity, General Dynamics fair value estimate is US$380
  • General Dynamics is estimated to be 29% undervalued based on current share price of US$269
  • Our fair value estimate is 32% higher than General Dynamics' analyst price target of US$289

Today we will run through one way of estimating the intrinsic value of General Dynamics Corporation (NYSE:GD) by projecting its future cash flows and then discounting them to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

The Calculation

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

Generally we assume that a dollar today is more valuable than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) estimate

2025 2026 2027 2028 2029 2030 2031 2032 2033 2034
Levered FCF ($, Millions) US$3.40b US$4.41b US$4.88b US$4.75b US$4.71b US$4.73b US$4.77b US$4.85b US$4.94b US$5.04b
Growth Rate Estimate Source Analyst x9 Analyst x9 Analyst x6 Analyst x1 Est @ -0.83% Est @ 0.25% Est @ 1.00% Est @ 1.52% Est @ 1.89% Est @ 2.15%
Present Value ($, Millions) Discounted @ 6.6% US$3.2k US$3.9k US$4.0k US$3.7k US$3.4k US$3.2k US$3.0k US$2.9k US$2.8k US$2.6k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$33b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.8%. We discount the terminal cash flows to today's value at a cost of equity of 6.6%.

Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = US$5.0b× (1 + 2.8%) ÷ (6.6%– 2.8%) = US$133b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$133b÷ ( 1 + 6.6%)10= US$70b

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is US$103b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of US$269, the company appears a touch undervalued at a 29% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.

NYSE:GD Discounted Cash Flow March 31st 2025

Important Assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at General Dynamics as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 6.6%, which is based on a levered beta of 0.901. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Check out our latest analysis for General Dynamics

SWOT Analysis for General Dynamics

Strength
  • Earnings growth over the past year exceeded its 5-year average.
  • Debt is not viewed as a risk.
  • Dividends are covered by earnings and cash flows.
    Dividend information for GD.
Weakness
  • Earnings growth over the past year underperformed the Aerospace & Defense industry.
  • Dividend is low compared to the top 25% of dividend payers in the Aerospace & Defense market.
Opportunity
  • Annual earnings are forecast to grow for the next 3 years.
  • Good value based on P/E ratio and estimated fair value.
Threat
  • Annual earnings are forecast to grow slower than the American market.
    What else are analysts forecasting for GD?

Moving On:

Although the valuation of a company is important, it ideally won't be the sole piece of analysis you scrutinize for a company. It's not possible to obtain a foolproof valuation with a DCF model. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. What is the reason for the share price sitting below the intrinsic value? For General Dynamics, there are three fundamental factors you should look at:

  1. Risks: Case in point, we've spotted 1 warning sign for General Dynamics you should be aware of.
  2. Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for GD's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
  3. Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!

PS. Simply Wall St updates its DCF calculation for every American stock every day, so if you want to find the intrinsic value of any other stock just search here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.

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