GD Surges on Proposed Military Budget, But DeepValue Report Warns of Overvaluation and Execution Risks

What happened

Aerospace and defense stocks, including General Dynamics, surged after a proposed $1.5 trillion military spending budget by Trump, with sector ETFs outperforming the S&P 500 in 2026. The DeepValue report underscores GD's strong moats in U.S. nuclear submarines and refreshed Gulfstream jets, supporting revenue growth to $50.3B TTM and solid FCF of $3.2B in 2024. However, the report highlights that GD's stock at $350 trades at a full P/E of 22.4, about 64% above the DCF value of $214, indicating limited margin of safety. Critical execution risks persist, such as FY25 funding for only one Virginia-class submarine and industrial-base throughput around 1.2 boats per year, which the budget proposal may not immediately resolve. Investors should view the surge skeptically, as it reflects optimism on future spending rather than de-risked fundamentals, aligning with the report's HOLD recommendation.

Implication

The budget proposal offers a potential catalyst for increased defense spending, which could benefit GD's Marine Systems segment if appropriations materialize. However, historical constraints like FY25's one-boat funding show that budget increases don't guarantee production hikes, with industrial-base and supply-chain issues lingering. Valuation remains a headwind, with the stock trading significantly above DCF, capping near-term upside potential. Gulfstream execution on G700/G800 deliveries and submarine cadence improvements are critical watch items that the budget alone doesn't address. Therefore, while the news is favorable, investors should await concrete appropriations and execution progress before considering a BUY, maintaining the report's HOLD thesis.

Thesis delta

The proposed budget introduces a positive catalyst for easing procurement uncertainties, but it does not materially alter the valuation or execution risks highlighted in the report; the core HOLD thesis remains unchanged, with added emphasis on monitoring budget realization and industrial-base throughput.