President John Kennedy’s predecessor Dwight Eisenhower admonished the world about the dangers of a growing “military-industry complex.” Since Ike issued that warning during his farewell address in 1960, the aerospace/defense industry has ballooned to mind-boggling proportions.

Sane human beings hate war, but successful investors take the world as they find it, not as they wish it to be. Expanding expenditures on aerospace/defense mark an unstoppable trend and a huge, multi-year growth opportunity that you shouldn’t pass up.

Below, we examine one of the world’s top defense contractors, General Dynamics (NYSE: GD). Will this military behemoth conquer the investment world in 2019?

In this edition of Investing Daily we will discover:

• Why is General Dynamics on Wall Street’s radar right now?
• Should you buy General Dynamics?
• Should you sell General Dynamics?
• Overall forecast and outlook for General Dynamics.

Let’s get into it!

Who Is General Dynamics?

Based in Falls Church, Virginia, General Dynamics is a global aerospace/defense firm. With a market cap of $53.1 billion, GD operates via four divisions: Aerospace; Combat Systems; Information Systems and Technology; and Marine Systems.

The Aerospace group develops and repairs combat aircraft; the Combat Systems group develops combat vehicles, weapons systems, and munitions. The Information Systems and Technology group provides IT products and services that support military, federal civilian, state, and local customers. The Marine Systems group develops and repairs surface ships and submarines for the U.S. Navy.

This brief video puts GD’s sprawling operations into clear context:

How Has General Dynamics Stock Performed?

• Over the past 12 months, GD has lost 9.7% versus a gain of 4.2% for the S&P 500.
• Over the past two years, GD has gained 4.2% vs. a gain of 21.5% for the S&P 500.
• Over the past five years, GD has gained 95.7% vs. a gain of 49% for the S&P 500.

How Has General Dynamics Performed In 2017/2018?

• In 2017, GD shares gained 15.9% compared to a gain of 19.4% for the S&P 500.
• In 2018 year to date, GD has lost 10.5% and the S&P 500 has lost 0.1%.

Who Are General Dynamics’ Rivals?

Together with General Dynamics, the following three U.S.-based giants monopolize the global aerospace/defense industry. Think of them as Weapons of Mass Wealth:

Lockheed Martin (NYSE: LMT)

With a market cap of $83.7 billion, Bethesda, Md.-based Lockheed manufactures a host of military aerospace products for the Pentagon and international clients. In addition to its core competency of combat fighters, the company makes missiles, satellites and coastal warships.

Lockheed’s cash cow is the F-35 Joint Strike Fighter, the most advanced combat jet ever built. The F-35 also happens to be the most expensive weapons system in history. More than 2,443 of the planes are on order and about 65 already have been built, at a cost of $84 billion.

Lockheed also makes the F-16 Fighting Falcon, which is the world’s most sought-after combat jet. Countries currently lining up for more F-16s include Turkey, Taiwan and Indonesia, among others.

General Dynamics for years manufactured the F-16, but in late 1992 GD sold F-16 production to rival Lockheed Martin. GD got back into the aircraft manufacturing industry in 1999 with its purchase of Gulfstream Aerospace.

Boeing (NYSE: BA)

Sporting a market cap of $182.2 billion, Boeing is the largest manufacturer of commercial and military aircraft in the world.

Boeing makes several combat aircraft widely used in the U.S. and other countries. The greatest demand for fighter jets will come from regional “hot spots” engaged in arms races. The company’s F/A-18 E/F Super Hornet is a particular favorite of developing nations that are seeking to enhance their defenses.

The Seattle-based manufacturer provides commercial stalwarts such as the 737 and 747, models that are staples of airline fleets around the world. BA also continues to win big orders for its crown jewel: the long-haul 787 Dreamliner, a carbon-composite aircraft that’s the most advanced commercial jetliner in the world.

Raytheon (NYSE: RTN)

Based in Waltham, Mass., Raytheon is a maker of cybersecurity products, intelligence-gathering sensors and missile systems. With a market cap of $50.2 billion, Raytheon is the maker of the Paveway laser-guided bomb, the Patriot missile, and the Iron Dome missile defense system in Israel.

Raytheon also provides the electronic “guts” and sensors for unmanned aerial vehicles. As the U.S. military shifts to drones and autonomous weapons guided by artificial intelligence, the company is positioned to profit.

Will General Dynamics Go Up In 2019 (Should You Buy)?

General Dynamics is a major defense industry player with entrenched ties to Pentagon brass. Compared to its competitors, General Dynamics also is a compelling value play.

With a forward price-to-earnings ratio (FPE) of only 14.6, General Dynamics is cheaper than the S&P 500’s FPE of 17 and the aerospace/defense industry’s FPE of nearly 18. The FPEs of Lockheed, Boeing and Raytheon are 27.4, 17.6 and 14.9, respectively.

And yet, General Dynamics enjoys the same powerful tailwinds as its rivals. The U.S. defense budget represents about 40% of the total global defense budget. Since the terrorist attacks of 9/11, the U.S. has spent nearly $6 trillion on war.

We face an entire decade of booming military expenditures in the U.S. and around the world. These vast sums will boost GD’s revenue and profits in 2019 and far beyond.

President Trump’s extremely hawkish and provocative foreign policy views virtually guarantee an expanded military. Indeed, Trump this year signed a $1.3 trillion omnibus budget bill that boosted 2018 defense spending by $60 billion over last year, for a total of $700 billion.

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On the day that Trump signed the bill, the Dow Jones Industrial Average dropped more than 400 points because of escalating trade tensions with China. But as the broader markets fell, major defense stocks soared. It’s a telling dynamic that benefits General Dynamics.

The Trump administration has antagonized China with protectionist trade measures. China is undoubtedly a bad actor when it comes to international trade, but tit-for-tat tariffs are unlikely to solve the problem. The world’s two largest economies are now rattling their sabers.

According to research firm IHS Markit, China’s defense budget will almost double from $123 billion in 2010 to $233 billion in 2020.

But providing a countermeasure to China isn’t the only reason that U.S. defense spending will increase. America’s allies are major customers for companies such as General Dynamics. Notably, Western Europe’s fight against terrorism and fears of an expansionist Russia should add approximately $10 billion to defense budgets across the Continent over the next five years.

As many analysts call for a stock market correction in 2019, America’s top defense contractors should weather the storm better than most other sectors. The defense industry also tends to be recession proof and the U.S. is overdue for an economic downturn.

The following chart shows projected U.S. defense spending until 2027, a bonanza that should transcend market gyrations and economic cycles:

The upshot: Investing in aerospace/defense is one of the surest ways to profit in what promises to be a turbulent 2019.

Will General Dynamics Go Down In 2019 (Should You Sell)?

The bear case for General Dynamics, as well as its defense industry peers, is the massive U.S. federal budget deficit, which could prompt Pentagon cutbacks.

U.S. Treasury Department data released in October 2018 show that President Trump’s first full fiscal year in office has generated the nation’s largest budget shortfall since 2012. The U.S. deficit widened in fiscal 2018 to $779 billion, which is $113 billion more than the previous year, according to the Treasury’s yearly report.

So much for fiscal responsibility. This monster deficit was created by the $1.5 trillion tax cut bill, combined with increased federal spending. The temporary stimulus has pushed overall corporate profits higher, but eventually the benefits of this one-time windfall will fade.

Overall General Dynamics Forecast And Prediction For 2019

To be sure, the federal deficit is worrisome. History shows, though, that the U.S. military usually gets its way, even as other programs get cut. The Pentagon never has to rattle a tin cup for funding.

That means General Dynamics is assured of multi-year funding. The stock also is a bargain compared to its rivals and the company’s growth prospects remain solid.

The average analyst expectation is for General Dynamics to rack up year-over-year earnings growth of 12.2% in 2018, 8.7% in 2019, and 12.9% over the next five years on an annualized basis.

Blues singer Mose Allison probably put it best: “You know, this world is just one big trouble spot.” Ceaseless strife around the globe bedevils humanity, but it’s a reliable source of revenue and profits for the defenders of our shores, chief among them General Dynamics.

John Persinos is the managing editor of Investing Daily.