Cowen raises price target for General Dynamics

Cowen Managing Director Cai von Rumohr joins Yahoo Finance Live to discuss the demand for General Dynamics planes.

Video transcript

JULIE HYMAN: We were just talking about what's happening with the airline industry. As part of that, of course, the big question, will business travel come back? So now we want to talk about our call of the day that has to do with a maker of those business jets. That is General Dynamics. And the analyst is Cai Von Rumohr. He is Cowen managing director and senior research analyst. Cai, it's good to see you. Looking at General Dynamics, which makes the Gulfstream, you're looking at a comeback in demand for these planes. Talk us through that thesis, first of all.

CAI VON RUMOHR: OK, well, you know, this has been a funny industry. You know, demand was essentially stagnant for a little over 10 years. And I think a couple of things changed. One was the COVID. COVID basically encouraged people to want the safety and convenience of not flying commercial air travel. And secondly, the number of high net worth individuals increased. So we've had a real pickup in demand.

And you've seen that most pronounced in terms of the pre-owneds available for sale have declined from a year ago. They were 7 and 1/2% of the fleet. Now it's down to 3.2%. That's really an unprecedented low. Every month, it goes lower. Departures are up there now above 2019 levels. Manufacturers' book to bills have all been well over 1 in both the second and third quarter. The manufacturers are talking about stronger pricing. So, really, you know, this has been a stronger cycle than they've seen since any time since 2007.

BRIAN SOZZI: Cai, is General Dynamics working on any new jets? And if they are, what are the margins on those?

CAI VON RUMOHR: So they basically have announced three new products, the G-700 and 800 that will get-- replace the 650 at the top end of the market. They should have very good margins because they are basically based on a 650 fuselage. The margins tend to be a little bit lower at the front end because you-- they level price and then you come down the learning curve. But the margin should be good there. And they've announced something called the G-400, which is a shortened derivative of the G-500, which will go into the $35 million niche.

When you shorten a plane, the margins probably are a little bit lower. But the attractive thing about the G-400 is that that's a niche where the two competitors have old products. So they're very-- and they have no product today. So they're very likely to have pretty good share gains.

BRIAN CHEUNG: Hey, Cai, it's Brian Cheung here. I want to ask about a downside scenario that you listed in your note, which is supply chain headwinds worsen. And this is, indeed, a very forefront concern. When it comes to the stream for parts for these types of products, what types of difficulties have you seen through 2021? And do you expect to see any of those remain headwinds in 2022?

CAI VON RUMOHR: That's hard to say. I mean, so far, there's been-- that hasn't been a major problem. I think getting labor has been something of an issue, but that's kind of a generic issue, I would say, for biz jets, for commercial aircraft, for, you know, for defense producers. So it's a risk, but, you know, there's no reason to think it's a bigger risk for General Dynamics.

Now, there is one point in terms of their deliveries in 2022 are only going to be up modestly over this year. And you'd ask why if demand is so strong. And the reason is that they had the final delivery of an older product, the G-550. Most of those this year, there'll be-- those will-- there will be none pretty much next year.

And they also delivered five or six flight test vehicles of the G-500 and 600. And those were produced in prior years. So that in COVID, they kind of took the production rate down. And now they're gating it up. But the number of planes being delivered this year is basically above what their production rate has been. But then '23 should be a much stronger year in terms of deliveries.

JULIE HYMAN: Cai, we're going to keep an eye on General Dynamics. Thank you so much for being here. Appreciate it. Cai Von Rumohr is Cowen managing director and senior research analyst. Appreciate it.