For more than a century, General Dynamics (GD) has helped the U.S. military fight its wars, most recently by supplying M1 Abrams battle tanks and nuclear-powered submarines that fire Trident missiles. The company’s best weapon for combating defense cuts, though, is a corporate jet coveted by chief executives and the wealthy.
The waiting time for delivery of a $64.5 million G650, the flagship plane of General Dynamics’ Gulfstream Aerospace unit, is almost four years, and well-heeled customers are willing to pay a premium to get their hands on the world’s biggest and fastest business jet even quicker. “It’s the must-have airplane if you’re in the top end of the spectrum,” says Steve Varsano, founder of London-based Jet Business, who has sold two pre-owned G650s since November for several millions more than the sticker price.
The popularity and profitability of the G650, the first plane Gulfstream has designed from scratch in more than four decades, is powering General Dynamics’ earnings as U.S. defense spending dwindles. The commercial aerospace unit will contribute about half of the company’s operating earnings by 2016 from less than a fifth in 2011, Credit Suisse (CS) says.
The G650’s prospects led Jeff Fahrenbruch, a fund manager at Barrow, Hanley, Mewhinney & Strauss, to snap up General Dynamics at $69 a share early last year as sequestration and budget cuts in Washington sent defense stocks plummeting. The company’s shares have surged 60 percent in the past 12 months, to about $110.
“We had the chance to buy a great Gulfstream business at a depressed defense company multiple,” says Fahrenbruch, whose Dallas-based investment firm oversees more than $90 billion of assets, including about $1.4 billion of General Dynamics shares. “The thing that is less appreciated is how much margin upside there could be as G650 production ramps up and matures.”
Investors initially frowned on General Dynamics’ $4.8 billion acquisition of Gulfstream in 1999, dragging down the shares almost 50 percent in nine months after the deal was announced. But last year revenue from the business jet unit rose 17 percent, to $8.1 billion, while the company’s combat systems division saw sales drop 23 percent, to $6.1 billion.
Barely 15 months after its debut, the G650 is now a corporate status symbol, with a roster of high-profile owners that includes ExxonMobil (XOM), Wal-Mart Stores (WMT), Qualcomm (QCOM), and Wynn Resorts (WYNN). Its lure: a potent mix of maximum speed, comfort, and range. Propelled by two Rolls-Royce (RR/:LN) engines, the G650 can reach 627 miles per hour at 30,000 feet, or about 93 percent of the speed of sound. It can seat as many as 18 people. Wood-veneer tables pop out for dining or work at the touch of a button. To ease jet lag, the cabin air pressure is kept higher than on typical airliners. Its 8,055-mile nonstop range allows transoceanic flying. And there won’t be a competitor that can challenge the G650’s long-range capabilities until 2016, when Bombardier’s (BBD/B:CN) Global 7000 is slated to start deliveries.
Gulfstream enhances the G650’s aura of exclusivity because it refuses to let buyers leapfrog others by swapping or buying earlier delivery slots, as often occurs with airliners. The company added a clause that strictly prohibits contract holders from selling their spots, says spokesman Steve Cass. “There is no cutting in line,” he says. “Everyone that we deal with is pretty important folks. Once you go down that, it’s a pretty slippery slope. You just don’t want to go there.”
Large, luxury aircraft are the lone bright spot in a $21 billion private-jet market still recovering unevenly from the financial crisis. While orders remain weak for small personal planes such as the Citation Mustang from Textron’s (TXT) Cessna Aircraft division, corporate fleet managers and billionaires are shopping again for big jets able to fly between continents.
The G650 may become Gulfstream’s most profitable plane, General Dynamics Chief Executive Officer Phebe Novakovic told investors on Feb. 20. The jet uses 50 percent fewer parts than the smaller and older G550 and G450 business jets and is assembled at a plant designed specifically for it, boosting efficiency. “We don’t know internally how good we can get, but we know we can get a whole lot better,” Novakovic said of the plane’s profitability.
Since becoming CEO in January 2013, Novakovic has scaled back sales to the U.S. Army—where the budget ax has fallen hardest—and reined in costs to boost profit. That’s set up the company to outperform defense peers Lockheed Martin (LMT) and Northrop Grumman (NOC) because of booming Gulfstream sales, Fahrenbruch says. “The profits on the defense business are holding up,” he says, “but you’re just getting this tremendous growth out of the Gulfstream business.”