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Defense contractor and aerospace company General Dynamics (GD) is flying higher to new all-time highs in the wake of a Q4 earnings report that highlighted a robust demand environment across its business segments that is also expected to continue as conflicts and tensions around the world intensify. Orders remain strong and broad-based, pushing GD's backlog to nearly $94 bln, representing the highest year-end total in its history.

• Bolstered by strong demand for its military equipment and its Gulfstream business jets, GD easily surpassed Q4 top-line expectations with revenue increasing 7.5% yr/yr to $11.67 bln. Breaking it down by business unit, Marine Systems generated the strongest growth at 15%, followed by Aerospace at 12% and Combat Systems at +8.5%.
  • A pair of contract modifications for the Columbia-class submarine program lifted Marine Systems results, while the wars in Ukraine and the Middle East are driving increased orders for armored vehicles and munitions in the Combat Systems unit.
• Furthermore, GD has another catalyst looming outside of the defense sector. After initially expecting FAA certification this past summer, GD is confident that its new G700 Gulfstream jet will receive certification in Q1. This should unlock a "surge of deliveries", according to CEO Phebe Novakovic.
• However, lingering supply chain issues continue to drive costs up, applying pressure to margins and earnings. In Q4, total operating expenses increased by almost 8% to $10.4 bln, limiting EPS growth to just 1.7%, missing analysts' expectations.
• Unfortunately for GD, these supply chain and labor-related headwinds are expected to continue in 2024. As a result, the company issued downside FY24 EPS guidance of $14.40, even as its revenue outlook of $46.3-$46.4 bln edged past expectations.

Based on the stock's spike higher, it's evident that the bullish demand story is taking precedence over the downside EPS guidance. With the Middle East conflict spreading and with no end in sight for the Ukraine-Russia war, along with rising tensions with China and North Korea, investors are betting that the strong demand environment will outlast these supply chain disruptions.