General Dynamics Corporation (GD)

Total return at 5 years: 8.0%/year = 6.0% appreciation + 2.0% dividend. The target price ($448) is ex-dividend; the $38 in dividends collected over 5 years are added separately.

By both methods, the value today (DCF $456 · Multiples $393) exceeds the market price ($335).

Today — fairly valued: at $335 trades ~14.6% below its value discounted to today (~$393); the discount is positive but does not reach the margin of safety we require (≥38%).

At 5 years — En valor: the target price ($448) plus dividends yield between the 4% floor and the 10% average return — a reasonable return, though without the margin of a great investment.

The bridge: the return at 5 years exceeds the risk-free rate (4.5%) — but the discount does not reach the required margin of safety (≥38%). To require a 15% annual return, it would need to be bought at ~$248.

Educational / informational. Does not constitute investment advice.

The inverse approach: instead of projecting growth to obtain the value, the market price ($335) is taken as given and it solves for what annual owner-earnings growth would need to hold for 5 years for the present value —at the method's rate (4.5%, no-growth terminal)— to equal that price. It is the disconfirmation test: the expectations the price already pays for, contrasted against the method's projection.

The market discounts less growth (-1.0%/year) than we project (5.5%/year) → if the base case holds, there is margin: perception is more pessimistic than the estimated reality.

That growth implies ~$4.3 bn of owner earnings in year 5 (vs ~$5.9 bn of our base case). It recalculates if the DCF assumptions are edited.

Year-by-year projection of the selected scenario. From each year, two versions of the flow are derived: growth FCF (operating flow − total capex, the cash surplus) and maintenance FCF (the owner earnings: what the business yields if it only sustains its capacity). Cash accumulates the retained surplus —what is not returned as dividend or buyback—, so that EV falls and multiples compress going forward. The valuation is done on EV/EBIT — suma de las partes. In edit mode, revenue, margins, capex, and exit multiples can be adjusted.

General Dynamics is valued as a sum of the parts: four segments of very different natures (Aerospace, a manufacturing+services hybrid; Marine and Combat Systems, capital-heavy manufacturing on multi-year government programs; Technologies, a capital-light IT services business) that are projected separately (revenue × their own margin) and each valued with its own EV/EBIT multiple within the band for its nature — not a single multiple on the consolidated figure. Year 0 = TTM ended 5-Apr-2026 (TTM rolling grid, §5 R1 bis). The Q2-2026 earnings release (8-K, 29-Jul-2026) carries no explicit updated annual guidance — it only reports the actual quarter—, so it does not re-anchor year 0; it is used as trajectory context (see the normalization note).

Today's elevated multiple is the price of growth: if the business grows, the entry point cheapens on its own going forward (EV falls as cash increases). The exit multiple at 3 years is higher than the terminal at 5 years —at 3 years there is more growth still ahead—, so the value curve shows whether value creation is concentrated in the early or the later years. The required return is applied to the base scenario.

They are valued separately, with their own rationale, and are not incorporated into the base or the verdict (they are excess return). When assigning them value — in Editmode —, the total with optionalities updates live, without moving the base.

The verdict, the base CAGR, and the margin of safety are always calculated on the base; optionalities do not alter them (with optionalities at $0 they do not move).

Each card fixes a required annual return and answers: if the business is worth $448 in 5 years, what is the maximum that can be paid today to obtain that return? Since it now trades at $335, the margin of safety is how much cheaper the market is than that maximum. The three thresholds: 4% covers inflation (the floor), 10% is the long-term average return, and 15% is the level of a great investment.

With a target price of $448 in 5 years plus $38 of dividends collected (the dividend adds to the return, not to the price) and a required return of 4.5% annually, the maximum to pay today is $393. Against the current market price ($335), the margin of safety is 14.6% (trades below the maximum → there is margin) and the total return at that price would be 8.0% annually.

• Multiple versus quality. 18× EBIT—the market already pays much of the exceptional-moat quality.
• Reverse-DCF. The inverse approach shows how much growth today's price discounts against the modeled base path.
• Margin of safety. Total return +8% below the method's 10% average profitability—narrow margin of safety at this price.

Each margin over sales, year by year: historical (solid line) → projection (dotted).

• ✓ ROIC exceeds the cost of capital (~10%)
• ✓ CFROIC backs up the ROIC (131%, cash vs. accruals)
• ✓ Healthy balance sheet (low corporate debt)
• ✓ Durable competitive moat (multiple advantages)

• ROIC exceeds cost of capital. ROIC ~14.9% on actual invested capital versus the 10% bar—in the good band, approaching exceptional.
• Margin and stability. Consolidated operating margin ~10.2%, dispersed by segment (7% in Marine Systems to 14% in Combat Systems)—the government cost-reimbursable contract mix limits consolidated margin versus pure industrial.
• Quality of cash. TTM FCF is inflated by a one-off spike in customer advances tied to submarine contracting rhythm; normalized, it converges with FY2025 reported FCF.

Annual levels from the official filing (10-K); the % over each bar is the year-over-year (YoY) growth vs the prior year.

The leading indicator for this business is backlog and book-to-bill (orders ÷ revenue), not a single volume-times-price KPI: in a multi-year defense contract business, the revenue contracted and not yet recognized anticipates years of performance ahead. Total backlog grew from $90,600 million to $118,000 million between FY2024 and FY2025 closes (+30%), and to $136,500 million at 2Q-2026 close, with 1.2× book-to-bill in Aerospace and 1.6× in defense segments during 2025—demand continuing to outpace production across all four segments.

The % are the annual (year-over-year) growth: each year —historical and projected— vs the prior one; the TTM (trailing 12m) vs the TTM of a year ago, to avoid overlapping windows. The historicals are exact figures from the official filings; the projected years come from the year-by-year model (the intermediate years without their own series are interpolated between the anchors). The projected columns (+1y…+5y) are 12-month windows counted from the TTM close (5-abr-2026): the projection starts from the most recently reported data, not the fiscal year. The projected base is realistic and unbiased — the risk discount is applied at the end, via the required return. The rationale for each metric is in the (i).

• Real, contracted, and visible. Record backlog ($118,000 million, +30% in FY2025) provides unusual revenue visibility for an industrial.
• Growth driver. Concentrated in two segments (Marine Systems and Aerospace, ~16-17% in FY2025); Combat Systems and Technologies grow more moderate.
• Deceleration and cycle. Path decelerates from +9.3% TTM to ~4.6% by year 5—realistic given scale reached, with no adverse-cycle signals today.

• Relevant in 10 years (recurrence). Defense programs spanning decades (submarines through 2034) and brand-leading executive aircraft—high recurrence and predictability.
• Pricing power. Limited on defense contracts (fixed-price/government cost-reimbursable), but real in Aerospace via Gulfstream brand and maintenance services.
• Moat and direction. Extraordinary moat (sole-source on submarines, Abrams, Stryker) and stable—backlog grew 30% in FY2025, which measures contracted demand and not the direction of the moat.
• Capital cycle. Risk is not competition (virtually none in sole-source businesses) but the U.S. government budget cycle and program termination possibility.

Not all debt is equal: only the structural needs refinancing; the rest is operational (self-liquidating).

Structural debt is what is exposed to the contraction phase of the cycle; operational debt (leases, matched funding) self-liquidates with the business.

• ✓Leverage (net debt / EBITDA)Net debt / EBITDA 0.7x
• ✓Interest coverage (EBIT / interest)23.3x
• –Liquidity (current ratio)no data
• ✓Cash quality (CFROIC vs ROIC)CFROIC backs 131% of ROIC
• !Value creation (ROIC − 10% bar)+5pp
• ✓Malinvestment test (capex vs incremental ROIC)Capex/D&A 1.3x
• ✓Float / working capitalFrees up cash $1.4 bn (float / negative WC)
• ✓Dilution (SBC % of revenue + shares)SBC 0.4% of revenue

A traffic-light interpreted by the method (not generic): float (negative WC) adds up, capex is judged by incremental ROIC (malinvestment test), and a lender is not subjected to corporate solvency. The (i) shows the derivation of each number.

• Leverage. Net debt ~0.7× EBITDA—low for capital-heavy defense manufacturing.
• Coverage and cash. Cash $3,654 million, broad interest coverage; room to sustain record-backlog capacity investment.
• Contract-execution risk. 51% of government revenue is fixed-price—an erred cost estimate (as with M10 Booker) can cut margin.

How cash comes in and how it is deployed. In green, the business's own cash (the owner-FCF it generates and reinvests); in gray, the float and credit — customer and funding money, which is not the shareholder's.

Priority is the dividend (28 years of consecutive increases) and reinvestment in production capacity (TTM capex $1,222 million, rising to sustain submarine and aircraft production pace); buybacks are modest and mostly cover compensation dilution, not large discretionary capital return. Leverage is low (net debt ~0.7× EBITDA), leaving room to invest in capacity without compromising credit rating.

Who owns the shares — the alignment and whether there is a controlling shareholder.

• Skin in the game. Longview Asset Management (Crown family) is the largest shareholder at 10.0%—a long-term anchor. Insiders as a group 1.4%.
• Capital allocation. 28 consecutive years of dividend increases; modest buybacks covering dilution; sustained reinvestment in capacity for record backlog.
• Integrity / normalization. Clear segment reporting with explicit note of tariff impact (30 basis points in Aerospace) and M10 Booker termination.

• No clear source of discount: there is no evidence of forced selling, spin-off, or lack of analyst coverage.
• The market pays for quality and record-backlog visibility with a multiple that already reflects much of that strength—a context of expanding global defense spending sustains the positive narrative.
• Known risks (budget cycle, program termination) are already in the price, but the expected return ahead is modest: it is not cheap.

No missing-buyers or motivated-sellers identified—the business is exceptional, but today's price does not leave much additional margin. The total return (+8%) trails the method's average profitability.

The annual return (CAGR at 5 years) in each scenario, with the total period return below — the margin of safety made visual: upside range wide, downside range narrow.

Even in the bear scenario, the return holds at +1%/year (+4% total): the margin of safety protects the downside. The bull (+16%/year, +111% total) exceeds it comfortably — a favorable asymmetry, with a narrow downside range and a wide upside range.

• U.S. government budget cycle. The central disconfirmer: a prolonged continuing resolution or spending priority shift delays or cuts programs supporting today's backlog.
• Contract termination. The government can terminate a contract for convenience at any time—already occurred with M10 Booker in 2025.
• Executive-aircraft business cycle. Aerospace is more economically sensitive than the rest of the defense business.
• Demanding multiple. 18× EBIT leaves little room if the market shifts to discounting budget risk.

Each thinker's analytical framework applied to our data.

• Buffett / Graham Quality + margin of safety

  A wide moat and ROIC 15% above the 10% bar, but the margin is limited (+15%) → excellent business at a fair price.

• Peter Lynch Growth at a reasonable price (GARP)

  A stalwart growing 6% at a multiple/growth of 3.2 → expensive for its growth.

• Joel Greenblatt Cheap and high-return (Magic Formula)

  Earnings yield 6% (EBIT/EV) + ROIC 15% → brushes the Magic Formula.

• Howard Marks Perception vs reality + cycle

  The price discounts -1% vs our 6%: perception is more pessimistic than reality, with an identified source of the discount.

• Seth Klarman Capital protection (bear scenario)

  Bear-scenario floor -2%/yr, bull-scenario ceiling +14%/yr over 5y → capital protected, asymmetry in your favor.

• Pat Dorsey Moat strength (Five Rules)

  A wide moat, stable; sources: intangibles, efficient scale, switching costs, cost advantage → passes the Five Rules.

• Aswath Damodaran Expectations implied by the price

  Justifying the price requires discounting -1%, within what we project (6%) — the story squares with the numbers.