Tic-tac-toe, investors want to know: After beating Wall Street's earnings estimates in each of its last two skirmishes, will General Dynamics (NYSE:GD) control the field again after tomorrow's third-quarter engagement?

What analysts say:

  • Buy, sell, or waffle? Twenty-one analysts follow General Dynamics, with one analyst going AWOL since last quarter. Thirteen now rate it a buy, and eight say to hold.
  • Revenue. On average, they expect to see sales increase 12% to $6.81 billion.
  • Earnings. Profits are predicted to rise 16% to $1.25 per share.

What management says:
CEO Nicholas Chabraja retains his title as the most laconic defense-contracting CEO on the planet, as General Dynamics' earnings releases remain pithy to a fault. Last quarter's update regaled investors with news of "double-digit operating-earnings growth in all four company segments." Chabraja did, however, take a moment to shine the spotlight on the Marine Systems division and praise its 150-basis-point improvement in operating margin. I have to wonder how long that can last, though, in light of the ongoing problems that the General, along with rival admiral Lockheed Martin (NYSE:LMT), is having getting the Navy to pay up for cost overruns at the Littoral Combat Ship project.

What management does:
Up until now, it's been hard to fault General D's performance. Its operating margins are still rising and still eclipsing those of rivals Northrop (NYSE:NOC), L-3 (NYSE:LLL), and Raytheon (NYSE:RTN). In fact, they're approaching those of more diversified industrial conglomerates like Textron (NYSE:TXT) and United Technologies (NYSE:UTX).

Margins

4/06

7/06

10/06

12/06

4/07

7/07

Operating

10.7%

10.8%

10.8%

10.9%

10.9%

11.1%

Net

6.9%

7.9%

7.9%

7.7%

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:
Looking at the table above, the first question that comes to mind is: "Operating results look so good, but what's with the net?" The answer to that is: "Nothing really bad." Digging through my files, I was reminded that General Dynamics' rolling net margin only appears to be falling. In fact, what it's doing is returning to normalcy after being temporarily inflated by a $216 million gain from discontinued operations recorded in the July 2006 quarter.

So how profitable is General D, really? At last report, the company was guiding toward $4.85 to $4.90 per share in profit this year, which would give the firm a current P/E ratio of about 18. As I argued earlier this month, that looks a bit rich. And in light of last week's developments in the MRAP program, which seem likely to curtail the General's dominance in production of mine-resistant, ambush-protected armored trucks, I'd argue the valuation here is going to get worse, not better.

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. The Motley Fool has a disclosure policy.