Word this week is that defense-industry financial performance was stronger in the second quarter than expected, with several of the biggest military contractors generating operating margins in the 12% range. Such returns probably aren’t sustainable given the looming specter of budget sequestration, but even if they were, 12% margins are nothing to brag about. Companies like Chipotle, Disney and Microsoft do much better. The simple truth is that defense companies can’t sustain margins above the low double digits because their market is too regulated — unless they are willing to follow the example of General Dynamics and diversify into other sectors. I have written a commentary for Forbes here.
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