General Dynamics (NYSE:GD) dodged a bullet last quarter, reversing tack on the previous quarter's underperformance of analyst estimates. When it reports earnings again on Wednesday, can the General keep up the good work, or are we beginning a pattern in which this defense industry heavyweight exceeds expectations one quarter only to disappoint in the next?

What analysts say:

  • Buy, sell, or waffle? Twenty-two analysts march to the beat of General Dynamics. A full dozen rate it a buy, nine more vote hold, and only one says sell.
  • Revenues. On average, they expect sales to increase 11% to $6.58 billion.
  • Earnings. Profits are predicted to rise 14% to $1.17 per share.

What management says:
It's not often when you get to say, "The CEO's credibility is shot," and that's a good thing. But in General Dynamics' case, it is. Back in January, CEO Nicholas Chabraja predicted that his firm would earn $1.02 in Q1, $1.10 in Q2, $1.19 in Q3, and $1.29 in Q4 this year. Already, he's proven himself wrong by earning a buck-seven last quarter. And if the analysts know what they're talking about, Chabraja is about to be proven wrong once again in Wednesday's news, by earning $0.07 more than promised at the start of the year.

The Board doesn't seem to mind Chabraja's profitable lack of prescience, though. Last month, the directors extended his contract by a little more than a year, to run through June 30, 2009.

What management does:
No surprise there. Chabraja has proven a pretty steady performer. Both operating and net margins today sit slightly above where they were when he took the helm 10 years ago, and compare favorably to a year ago as well. When compared to its defense industry peers, General D's operating margins also look pretty good -- outclassing the high-single-digit operating margins of Northrop (NYSE:NOC), Lockheed (NYSE:LMT), and Raytheon (NYSE:RTN), and coming close to the levels of rivals like Textron (NYSE:TXT) and United Technologies (NYSE:UTX).

Margins

12/05

4/06

7/06

10/06

12/06

4/07

Operating

10.6%

10.9%

10.9%

10.9%

11.2%

11.2%

Net

7%

6.9%

7.8%

7.9%

7.7%

7.7%
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
General Dynamics divides its business into four main segments: information systems and technology (IST), combat systems, marine systems, and aerospace. Respectively, these four segments account for 38%, 25%, 20%, and 17% of revenues. Unfortunately, it's General Dynamics' smallest unit -- Aerospace -- that makes the best margins on its sales -- nearly a 16% operating margin.

Trend-wise, we've got good news and bad news for General Dynamics shareholders. The good news is that three out of the four divisions improved their profitability in Q1 as compared to Q1 2006. The bad news: It was the General's biggest business -- IST -- that defied the trend and posted a 70 basis point year-over-year deterioration in operating margins. If there's one thing the company can do to juice its already better-than-expected earnings even further going forward, I'd say it would be to get margins moving in the right direction in this IST division.

Get a better general picture of the General's recent performance with:

Fool contributor Rich Smith does not own shares of any company named above.