Last year was good to defense contractor General Dynamics (NYSE:GD), the shares of which bucked the market's overall stagnant trend to rise as much as 20% toward year's end. Will 2006 be similarly kind? We may get our first glimpse at how the company is doing when the company announces its Q4 and full-year 2005 results on Wednesday and perhaps drops some hints about what the future may hold.

Wall Street Wisdom:

  • General consensus. For all the talk of a slowdown in the defense sector, Wall Street still salutes the General. Of the 22 analysts tracking the company's progress, 13 of them rate the company a "buy," while only one says "sell," and the rest remain on the fence.
  • Revenues. Consensus estimates agree that General Dynamics grew its revenues by about 10% in Q4 2005. Not bad.
  • Earnings. And the profits picture looks better still. With analysts calling, on average, for about $1.97 per share in profits, it seems they think the company grew earnings at better than twice the rate of revenues.

Margin watch:
Most financial data sites list General Dynamics as having a gross margin of "X," an operating margin also of "X," and a net margin of "Y." The fact of the matter is, though, that the company doesn't report a gross margin in its 10-Q filings at all. It starts with sales and subtracts operating costs, and so the first margin you see is an operating margin. Here's how the trends in the two margins the company does report have been running lately.

Mrg. %

7/04

10/04

12/04

4/05

7/05

10/05

Op.

9.1%

9.7%

10.1%

10.1%

10.1%

10.2%

Net

6.1%

6.3%

6.4%

6.7%

6.7%

6.7%

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

Valuation metrics:
Analysts project a slow but steady 10%-per-annum upwards march for the General's earnings. By traditional measures, that doesn't quite justify the firm's 17-times trailing earnings multiple. Its free cash flow multiple of 14 times is a bit closer to the mark, however.

Competitors:
The defense industry is a pretty clubby bunch, so it's hard to term anyone an eternal competitor here. However, companies operating in the same general space include such big names as Lockheed (NYSE:LMT), Raytheon (NYSE:RTN), and Northrop Grumman (NYSE:NOC).

Fool contributorRich Smithdoes not own shares of any company named above.