Georgia Business Report & Journal
By Lou Phelps

July 17, 2002

The stock of General Dynamics, parent firm of Gulfstream Aerospace, the largest employer in Chatham County, is flying high -- too high, maybe, according to a new and innovative stock research company that tracks the operational cash flow of companies and looks for warning signals and over-priced stocks.

As part of its research tactics, StockDiagnostics.com uses the information publicly traded companies must make public to reach independent conclusions which often differ from the conventional wisdom of Wall Street. One factor the firm looks at is operational cashflow. Using a formula it has devised to calculate this, the company comes up with its trademarked rating of "OPS", or operational cashflow per share -- a more effective measurement than the traditional earnings per share measure, StockDiagnotics.com Director of Research Michael Markowski maintains.

General Dynamics Corporation's stock price to OPS multiple hit a three-year high of 23.7 on June 21, 2002. The previous five-year high of 27.7 for its stock price to OPS (P/OPS) multiple was reached on March 29, 1999. In layman's terms, this means that investors have been willing to pay a high price for the stock when the price compared to the operating cash flow of its last reported quarter.

In its most recent 19 quarters dating back to October of 1997, there have been only three quarters where General Dynamics' per share/OPS multiple has exceeded a multiple of 20 times trailing twelve month OPS; the first two quarters of calendar 1999 and the most recent quarter reported.

The first quarter of each fiscal year for General Dynamics is never a strong quarter, according to representatives of the company, which has reported a loss from operations of $19 million in 1st Qtr. 1999, $77 million in 1st Qtr. 2000, a gain of $26 million in 1st Qtr. 2001, and now the loss of $104 million in 1st Qtr. 2002. During 1999, while the company had negative cash flow of $19 million from operations, it actually was able to report a $143 million positive cash flow for the quarter due to a favorable tax ruling that brought the company $163 million.

Separately, according to www.StockDiagnostics.com, for the 1st quarter this year, General Dynamics' OPS was a negative $.43 as compared to the same quarter in 2001 which had a positive quarter of $.36. The negative quarter was the company's first after 17 positive OPS consecutive quarters. For its trailing 12 months General Dynamics OPS decreased by 18% from $5.75 to $4.66

The negative OPS calculation for General Dynamics' first quarter ending March 31, 2002 is a definite contrast to its earnings per share (EPS) reported, which is a prime example of the problem one has in using EPS (earnings) as the key metric in valuing a stock or a public company, according to Markowski. At first glance, General Dynamics' EPS of $1.14 for its first quarter ending March 31, 2002, appears to be okay, he explained -- EPS declined by $.05 per share or decreased by 4.9% as compared to its year earlier EPS of $1.19. However, when comparing its EPS for its first quarter of 2002 with its OPS for the same quarter last year, the picture is very different as the company has negative OPS of (.43) which sums up to a cash flow deficit of $1.57 per share instead of the reported EPS of $1.14.

According to General Dynamics' representatives, the reason for the poor operating cash flow performance for the quarter ended March 31, 2002 was due to high receivables and high inventory due to an order cancellation five days prior to the end of the quarter by Avolan, a division of United Airlines, which was putting together a fractional-share ownership of aircraft. The matter is presently in the courts, and the inventory will eventually be sold to another customer, they stated.

They also point out that General Dynamics (NYSE:GD) routinely meets or exceeds Wall Street analysts' expectations, and has not taken a write-off since 1991.