General Dynamics (NYSE:GD): Upgraded by Morgan Stanley

Morgan Stanley is upgrading General Dynamics (NYSE:GD) to Overweight from Equal-Weight and raising price tgt to $80 from $52:

It’s time to buy GD, drivers could take shares beyond our $80 PT. GD’s current valuation prices in an extended trough, whereas we project a Gulfstream recovery starting in 2011. Anecdotal evidence from industry contacts, a pickup in used jet sales (leading indicator of a turn) and some new orders indicate the upper end bizjet demand is thawing, warranting a higher aero multiple for Gulfstream. Although early, GD offers investors an option on the Chinese business jet market that could drive substantial incremental demand. Weeks ago the Chinese government announced changes to open up its airspace for business jets, effectively unlocking the Chinese market (only 100 or so business jets in operation in China today). Gulfstream would be a lead beneficiary of a sea change in Chinese bizjet demand, which could drive a re-rating for Gulfstream.

Where We Differ: GD’s valuation reflects enduring concerns about Gulfstream’s outlook, but improving demand internationally heightens confidence in deliveries, especially in 2011-12 and we’re raising our EPS estimates. GD trades in-line with defense peers at 9X 2011 EPS, implying an equivalent 9X P/E on the Gulfstream business. But if the business jet recovery plays out, Gulfstream could more rightfully enjoy a mid/high-teens multiple (adds $13 - $17 per share) excl. China upside, pointing to $80 or higher.

Revising Industry View to In-Line: Defense is down 1% YTD (15% underperformance rel. to S&P), and has sizably missed the S&P rally this year. But we believe that a bearish view on Defense is now consensus and has more or less fully played out.

Action: I really like this call. Not much is expected from biz-jets so Morgan Stanley's comments stand out. And China as a source for upside - sounds sexy, doesn't it?

This call will definitely generate some buying interest. I expect the shares to trade to at least $65 today, maybe even making a new 52-week high this week.

If GD goes too high too soon then TXT represents a good secondary play.