General Dynamics Fights Through Wartime Slump

For at least one prime defense contractor, the war slump paradox appears to be resolved. For now. 

Shares of General Dynamics soared 8% on an earnings beat Wednesday, erasing much of the company’s losses since the start of the Iran War in late February. But is it enough to alter Wall Street’s perception of old school defense players?

Defensive Position

It’s been 60 days since the beginning of “Operation Epic Fury,” and in that time, the Pentagon has spent roughly $25 billion on the war, acting Pentagon Comptroller Jules Hurst III told Congress on Wednesday. For prime defense contractors, those two months have delivered a freefall from record high share prices. General Dynamics fell 14% since the start of the war through Tuesday, making it one of the better performers among major defense players; Lockheed Martin and Northrop Grumman have each slipped by about 25%. 

The downturn comes even as the US and other Western powers continue a widespread military spending ramp-up. Defense Secretary Pete Hegseth reiterated to lawmakers on Wednesday the White House’s long-stated desire for a $1.5 trillion defense budget for fiscal year 2027.

Blame a new batch of shiny war toys, for one:

• US defense spending is set to hit a record $1 trillion this year, though RBC Capital Markets equity analyst Ken Herbert recently told The Wall Street Journal that spending on legacy programs is largely flat while spending on new tech such as drones and AI is up roughly 20%. 
• In fact, spending on newer tech surpassed legacy programs for the first time this year. The trend has, in turn, expanded the pool of contractors to new upstart tech-native players that, surprise, surprise, operate with far juicier margins than the industrial legacy players; in its last earnings call, Palantir reported gross operating margins of 57%, while prime contractors are happy to sniff double digits.

Rebound: Investors also held concerns that the boom in military spending in the lead-up to the Middle East conflict would be short-lived. General Dynamics impressed participants in its earnings call on Wednesday in part by dispelling the notion. Its order backlog now totals $130 billion, way up from $88 billion a year ago. Meanwhile, the company reported $13.5 billion in revenue, up 10% year-over-year, and profits exceeding $1.1 billion, up 13% year-over-year.