Lockheed Martin (LMT 1.34%) kicked off "defense earnings" week Tuesday -- and it started not with a bang, but a whimper. Revenue roared at Lockheed in Tuesday's report, but contracting profit margin sapped Lockheed's ability to profit from doing more business. The result: Lockheed Martin's stock price tumbled after earnings.
Luckily, before defense investors had too much time to panic, Lockheed peer General Dynamics (GD 0.87%) arrived to save the day -- and General Dynamics had a completely different tale to tell.
Lockheed Martin's mirror image
In just about every respect, General Dynamics' report Wednesday was the mirror image of Lockheed's. Where Lockheed saw revenue rise 7% in Q1 2017, General Dynamics' revenue declined by about half a percent. On the other hand, where Lockheed Martin's margin contracted, General Dynamics' margin expanded.
Let's review: General Dynamics has four main business divisions:
- Aerospace -- primarily Gulfstream business jets.
- Combat systems -- Abrams tanks and Stryker APCs.
- Information systems and technology (IS&T) -- electronics and IT for both military and commercial customers.
- Marine systems -- submarines and destroyers.
Sales grew in General Dynamics' first two divisions in the first quarter, with revenue rising 3.4% in combat systems and soaring 16.5% in aerospace, on the back of improved Gulfstream deliveries. Conversely, sales slid 7.8% at General Dynamics' IS&T division, and 9% in marine systems. As already mentioned, this all added up to about a 0.5% revenue decline for General Dynamics as a whole -- the opposite of what we saw at Lockheed Martin on Tuesday.
Now here's the good news: Profit margin expanded at every General Dynamics division, save marine systems. This division, already the least profitable of General Dynamics' four business units, saw margin fall another 40 basis points to 8.3%. But margin expanded at IS&T (operating margin of 11%), at Combat Systems (15.9%), and, most important of all, at aerospace -- which now earns 21.4% operating profit margin and is by far the company's most profitable division.
General Dynamics' secret weapon
Here's why this last point is so important to General Dynamics: With $8.4 billion in sales last year, Aerospace was already General Dynamics' second biggest division by revenue, and with $1.7 billion in operating profit, those Gulfstream business jets that aerospace builds were already the company's biggest earnings driver. And now aerospace is even bigger, and even more profitable, than ever.
How much bigger and more profitable is aerospace today? Factoring in last quarter's $293 million revenue increase at aerospace and its $111 increase in profits, and adding them to the historical data provided by S&P Global Market Intelligence, it appears that the aerospace division is generating more than $8.6 billion in annual revenue and earning well over $1.8 billion in profit thereon.
Aerospace is so profitable, in fact, that the increase in profit margin there helped to pull up profit margin for General Dynamics as a whole by 150 basis points last quarter, to an overall operating profit margin of 13.9%.
The upshot for investors
While still not the biggest, General Dynamics can now boast that it is the single most profitable defense company in America -- more profitable than Lockheed Martin, than Boeing, than Northrop Grumman or Huntington Ingalls. General Dynamics now squeezes more profit pennies out of each revenue dollar than even Raytheon, whose 13.5% operating profit margin still lags General Dynamics by 40 basis points.
And the craziest thing of all? The division that did all this for General Dynamics -- Gulfstream business jets -- isn't even a defense business at all.