Stock Analysis on Net

General Dynamics Corp. (NYSE:GD)

This company has been moved to the archive! The financial data has not been updated since October 28, 2020.

Present Value of Free Cash Flow to the Firm (FCFF)

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In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Free cash flow to the firm (FCFF) is generally described as cash flows after direct costs and before any payments to capital suppliers.


Intrinsic Stock Value (Valuation Summary)

General Dynamics Corp., free cash flow to the firm (FCFF) forecast

US$ in millions, except per share data

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Year Value FCFFt or Terminal value (TVt) Calculation Present value at 11.80%
01 FCFF0 2,354
1 FCFF1 2,633 = 2,354 × (1 + 11.86%) 2,355
2 FCFF2 2,912 = 2,633 × (1 + 10.60%) 2,330
3 FCFF3 3,184 = 2,912 × (1 + 9.33%) 2,278
4 FCFF4 3,441 = 3,184 × (1 + 8.07%) 2,202
5 FCFF5 3,675 = 3,441 × (1 + 6.80%) 2,104
5 Terminal value (TV5) 78,593 = 3,675 × (1 + 6.80%) ÷ (11.80%6.80%) 45,002
Intrinsic value of General Dynamics Corp. capital 56,272
Less: Short- and long-term debt principal (fair value) 12,339
Intrinsic value of General Dynamics Corp. common stock 43,933
 
Intrinsic value of General Dynamics Corp. common stock (per share) $153.09
Current share price $132.43

Based on: 10-K (reporting date: 2019-12-31).

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.


Weighted Average Cost of Capital (WACC)

General Dynamics Corp., cost of capital

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Value1 Weight Required rate of return2 Calculation
Equity (fair value) 38,004 0.75 14.89%
Short- and long-term debt principal (fair value) 12,339 0.25 2.28% = 2.97% × (1 – 23.18%)

Based on: 10-K (reporting date: 2019-12-31).

1 US$ in millions

   Equity (fair value) = No. shares of common stock outstanding × Current share price
= 286,972,150 × $132.43
= $38,003,721,824.50

   Short- and long-term debt principal (fair value). See details »

2 Required rate of return on equity is estimated by using CAPM. See details »

   Required rate of return on debt. See details »

   Required rate of return on debt is after tax.

   Estimated (average) effective income tax rate
= (17.10% + 17.80% + 25.70% + 27.60% + 27.70%) ÷ 5
= 23.18%

WACC = 11.80%


FCFF Growth Rate (g)

FCFF growth rate (g) implied by PRAT model

General Dynamics Corp., PRAT model

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Average Dec 31, 2019 Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015
Selected Financial Data (US$ in millions)
Interest expense 472 374 117 99 98
Discontinued operations, net of tax (13) (107)
Net earnings 3,484 3,345 2,912 2,955 2,965
 
Effective income tax rate (EITR)1 17.10% 17.80% 25.70% 27.60% 27.70%
 
Interest expense, after tax2 391 307 87 72 71
Add: Cash dividends declared 1,177 1,101 1,008 932 888
Interest expense (after tax) and dividends 1,568 1,408 1,095 1,004 959
 
EBIT(1 – EITR)3 3,875 3,665 2,999 3,134 3,036
 
Short-term debt and current portion of long-term debt 2,920 973 2 900 501
Long-term debt, excluding current portion 9,010 11,444 3,980 2,988 2,898
Shareholders’ equity 13,577 11,732 11,435 10,976 10,738
Total capital 25,507 24,149 15,417 14,864 14,137
Financial Ratios
Retention rate (RR)4 0.60 0.62 0.63 0.68 0.68
Return on invested capital (ROIC)5 15.19% 15.18% 19.45% 21.08% 21.47%
Averages
RR 0.64
ROIC 18.48%
 
FCFF growth rate (g)6 11.86%

Based on: 10-K (reporting date: 2019-12-31), 10-K (reporting date: 2018-12-31), 10-K (reporting date: 2017-12-31), 10-K (reporting date: 2016-12-31), 10-K (reporting date: 2015-12-31).

1 See details »

2019 Calculations

2 Interest expense, after tax = Interest expense × (1 – EITR)
= 472 × (1 – 17.10%)
= 391

3 EBIT(1 – EITR) = Net earnings – Discontinued operations, net of tax + Interest expense, after tax
= 3,4840 + 391
= 3,875

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [3,8751,568] ÷ 3,875
= 0.60

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 3,875 ÷ 25,507
= 15.19%

6 g = RR × ROIC
= 0.64 × 18.48%
= 11.86%


FCFF growth rate (g) implied by single-stage model

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (50,343 × 11.80%2,354) ÷ (50,343 + 2,354)
= 6.80%

where:

Total capital, fair value0 = current fair value of General Dynamics Corp. debt and equity (US$ in millions)
FCFF0 = the last year General Dynamics Corp. free cash flow to the firm (US$ in millions)
WACC = weighted average cost of General Dynamics Corp. capital


FCFF growth rate (g) forecast

General Dynamics Corp., H-model

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Year Value gt
1 g1 11.86%
2 g2 10.60%
3 g3 9.33%
4 g4 8.07%
5 and thereafter g5 6.80%

where:
g1 is implied by PRAT model
g5 is implied by single-stage model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5g1) × (2 – 1) ÷ (5 – 1)
= 11.86% + (6.80%11.86%) × (2 – 1) ÷ (5 – 1)
= 10.60%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 11.86% + (6.80%11.86%) × (3 – 1) ÷ (5 – 1)
= 9.33%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 11.86% + (6.80%11.86%) × (4 – 1) ÷ (5 – 1)
= 8.07%