Merrill Lynch raises estimates for General Dynamics (NYSE:GD) well ahead of mgmt's initial outlook for 2007 given on its 4Q earnings call. Firm now forecasts 07E EPS of $4.85, up from prior estimate $4.80. 08E EPS is now $5.45, up from $5.30, and their outyear EPS estimates reflect similar changes. Firm notes that GD is not baking in potential contracts from the Army's supplemental spending, due to mgmt's view that timing of such contracts is highly unpredictable. While firm believes it is prudent for management to take a conservative stance, they believe significant earnings upside could result from the supplemental.
Firm expects Combat Systems to significantly benefit from exposure to the Army supplemental, which may be better than our previous expectations. According to the latest budget documents, they believe GD stands to benefit from a $3.0bn budget tailwind. Firm expects Congress to pass a total of $160 to $170bn in FY07 supplemental funding ($70bn bridge funding and $90 to $100bn GWOT funding). Through Combat Systems, GD has greater exposure to the U.S. Army than any of the other large cap defense primes. Firm believes this should fuel greater-than-peer top-line growth in defense businesses over the next several years.
Firm's price objective goes up to $87 from $80.
Notablecalls: Highlighting it because it is Merrill and I happen to like the chart.