4 eps from continuing operations rose 7 to 265

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consolidated operating margin declined 70 basis points to 13.4%. EPS from continuing operations rose 7% to $2.65, benefiting from a lower tax rate and reduced share count, and topped the consensus forecast of $2.52. Along with the 4Q results, management reiterated its 2018 guidance. The company expects top-line growth of 4.5-5.0%, an operating margin of 13.1%, and EPS of $10.90-$11.00. GD, like many of its defense industry peers, tends to issue conservative guidance and then raise expectations over the course of the year. Management typically updates guidance along with 2Q earnings in July. In addition to organic growth, the company grows through acquisitions. In April, GD paid $9.7 billion to acquire information technology company CSRA. The transaction is expected to be accretive to GAAP earnings per share and free cash flow per share in 2019. It is also expected to generate estimated annual pretax cost savings of approximately 2% of the combined company’s revenue by 2020. In March 2018, GD raised its quarterly dividend payout by 10.7% to $0.93, or $3.72 annually, for a yield of about 1.7%. EARNINGS & GROWTH ANALYSIS GD has four primary business segments: Aerospace (24% of 1Q revenue), which includes the Gulfstream jet business; Combat Systems (19%), which builds battle tanks and other land combat equipment; Marine Systems (27%), which builds nuclear- powered submarines and combat-logistics ships; and Information Systems and Technology (30%), which provides secure communications systems and cyber products. Except for Aerospace, all segments posted year-over-year revenue growth in 1Q. The Combat Systems division benefited from sales of the Stryker and Abrams tanks, as the top line grew 12%. IS&T posted 4% revenue growth; this division will be split next quarter into two units – Mission Systems and General Dynamics Information Technology (GDIT) — as the CSRA acquisition is integrated into GDIT. In Marine Systems, revenue rose 5%. Aerospace revenue was down 12% due to two delayed plane deliveries that management says will be made in 2Q. The total backlog at the end of 1Q18 declined slightly from the prior quarter to $60.3 billion, and the estimated potential contract value (representing management’s estimate of the value of unfunded indefinite-delivery, indefinite-quantity (IDIQ) contracts and unexercised options) was $24.6 billion. At the end of the quarter, the total potential contract value — the sum of all backlog components — was a healthy $85 billion, or about three years’ worth of orders.
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M ARKET D IGEST - 7 - On the expense side, the operating margin was 13.4% in 1Q18, down 70 basis points. Segment operating margins increased only in Marine Systems. We look for stronger margins going forward, beginning in 2Q with Aerospace. Management is targeting steady margins in 2018. Based on the positive top-line trends in Combat Systems, we are raising our 2018 EPS estimate to $11.25 from $11.17.
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