To many sports coaches, defense is the best offense. In today’s stock market, defense is one of the few industries where investors can find appealing valuations and solid underlying business fundamentals to move portfolios forward. Top on my list is General Dynamics (NYSE:GD), which reported second-quarter results on Wednesday ahead of analyst projections and also upped its full-year guidance.
Total sales advanced a healthy 10.9% to $8.1 billion as combat systems (30% of total sales) jumped 19.4%. Of this total, 14% stemmed from organic growth on increased Stryker and Abrams volumes; the rest represented acquisitions, including one in the weapons system business.Aerospace (17% of sales) improved 6.5%, which was a decent performance considering that flagship Gulfstream sales fell 16% and the company experienced “continued pressure” on its related service business. As such, the division is focused on cost reductions until the sales environment improves. Operating earnings results were more mixed, with positive growth experienced only in combat and marine systems. And though aerospace sales held up, operating earnings fell 10.4% compared to last year’s second quarter. Management was quick to point out that they grew 7.5% sequentially, speaking to how well it is “managing through this down cycle.” The total company sales backlog grew 22%, demonstrating that General Dynamics is holding up quite well overall and its defense businesses are proving recession resistant.Future Looks Bright
Quarterly reported earnings fell ever slightly, decreasing a penny, or 0.6% to $1.60 per share. For the full year, General Dynamics projects further challenges at Gulfstream but total sales advanced 11% and 2009 earnings from continuing operations are expected to be between $6.05 and $6.15. And if past years are any guide, 2009 will represent another year of solid free cash flow generation, though so far this year operating cash flow has fallen by nearly half on a big change in customer advances and deposits.The Bottom Line
General Dynamic’s results are closely tied to the Department of Defense’s budgets. As such, its fortunes are tied to government and political forces outside of its control. During the earnings conference call, management referenced the DoD’s Quadrennial Defense Review, and detailed that its businesses “will emerge from this review well supported.” Rivals including Lockheed Martin (NYSE:LMT) and Northrop Grumman (NYSE:NOC) are subject to these same forces, yet the majority of industry players are seeing operations hold up extremely well as they can lay claim to business models that are relatively immune to the ups and downs in the business cycle. (For additional reading, check out Recession-Proof Your Portfolio.)
Marine systems sales (20% of sales) increased 16.6% on balanced growth across all three of the firm’s shipyards. Information systems (33% of sales) eked out a 3.5% top-line improvement on organic growth and addition of a surveillance and imaging technologies business.
Archrival Textron (NYSE:TXT) reported a much more severe decline during its second-quarter as sales plummeted 29%. Industrial conglomerate Teleflex (NYSE:TFX) reported an equally dismal quarter in its second quarter as aerospace product and service sales fell 44%. Overall, General Dynamics relayed that it is seeing sales stabilization in its business jet market.