Despite softening military demand and politically-driven delays in contract awards, defense-industry bellweather General Dynamics outperformed its peers and market expectations in the third quarter. The company’s earnings results released this morning indicate that Chairman Jay Johnson managed to raise earnings per share by 7.6% and increase backlog to a stunning $58.5 billion, representing two years worth of revenues at current rates. Although sales were off slightly year-over-year, reflecting slowing demand from military customers and the uneven pacing of contract awards, margins were up in all four of the company’s major business units, highlighting what BankofAmerica/MerrillLynch analyst Ron Epstein described as GD’s “execution prowess.”
GD’s third-quarter performance is the latest indication that the company has successfully transitioned its management culture from the consistently positive track record of industry legend Nick Chabraja to a more reserved but equally capable Jay Johnson. No other first-tier company in the defense sector has managed to match GD’s track record for consistent returns, and today’s results suggest that the money machine continues to run very smoothly. Johnson can’t change the fact that U.S. forces are departing Iraq and business jet results are subject to weak global economic conditions, but by constantly pressing his subordinates to squeeze out costs and deliver quality, he has proven that defense companies still can outperform. As Cowen & Company analyst Cai von Rumohr commented today, under Johnson’s leadership GD is generating “better than expected margins in all areas.”
Recent contract bookings suggest that GD will continue the pattern of positive results for some time to come. Last week, the company inked a billion-dollar deal with the government of Canada to upgrade that country’s fleet of light armored vehicles. This week it got a $600 million Army order for 300 more Stryker troop carriers with reinforced under-hull armor. And a Chinese aircraft leasing company just ordered $800 million in business jets spanning Gulfstream’s product line. GD’s Gulfstream unit is now firmly positioned as the global gold standard for high-end business jets, so it isn’t surprising that it is getting more orders from the part of the world where economic growth is strongest. The fall-off in free cash flow that GD reported for the third quarter appears to be a blessing in disguise, because it reflects the buildup of Gulfstream inventory for deliveries that will be made in the fourth quarter.
Bottom line: Jay Johnson is turning out to be even better at running a big defense contractor than he was at reforming the sea services when he was Chief of Naval Operations. No other senior military officer in modern times has managed to become a top performer in the world of corporate finance, but Johnson seems to have pulled it off. The fact that he hasn’t turned into an ego-maniac in the process makes his tenure at GD all the more appealing. When it comes to steadiness of purpose and delivering results, Jay Johnson is about as good as it gets in modern America. Is it too late to get this guy on the ballot in New Hampshire?
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