Investors, ten-hut! General Dynamics (NYSE:GD) is forming ranks and ready for review. The defense contracting powerhouse reports its Q2 2006 earnings results -- when else? -- at the crack of dawn tomorrow.

What analysts say:

  • Buy, sell, or waffle? Twenty-one analysts march to the beat of General Dynamics. Thirteen of them say you should buy the stock; the rest say hold.
  • Revenues. They expect sales to increase, on average, 10% to $5.8 billion in the second quarter.
  • Earnings. And for the General to turn that into an 18% boost in profits, at $1 per share.

What management says:
The General's biggest news of late was its announcement of the completion of its purchase of IT specialist Anteon, which was effected last month. Read all about the deal here.

Expect margins to be compressed somewhat in coming quarters as the company incurs the costs necessary to integrate Anteon (a sizeable company in its own right, with more than 10% of the payroll General Dynamics boasts). Fortunately, as GD CEO Nicholas Chabraja noted in last quarter's earnings report, the company's margins are already strong and getting stronger, and should be able to stand a little contraction. In fiscal Q1 2006, the company grew its margins in three of its four segments. The one segment where margins did not expand (information systems) saw margins slide just five basis points.

What management does:
Looking through the broader lens of trailing-12-month results (which smooth out quarter-to-quarter gyrations in margins), we can see that the business has been improving its operating profitability quite steadily over the last year and a half. On the bottom line, the upwards trend is less evident, but the firm has at least been able to hold its net margins steady for the last year, despite Uncle Sam taking increasingly large tax bites out of operating profits.

Margins %

12/04

4/05

7/05

10/05

12/05

4/06

Op.

10.2

10.2

10.2

10.3

10.3

10.6

Net

6.4

6.7

6.8

6.8

6.9

6.8
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:
As good as things are today, a truly long-term lens reveals that there's still plenty of room for margin improvement here. Although net profit margins in the high 6% range look good in comparison to the low sixes it was posting circa 2003 and 2004, in years past the General has shown itself to be capable of producing super-sized profits when the conditions are right. In fact, it didn't have a sub-7% year from 1991-2001 -- which suggests to this Fool that this turnaround is far from complete.

Competitors

  • Boeing (NYSE:BA)
  • L-3 (NYSE:LLL)
  • Lockheed Martin (NYSE:LMT)
  • Northrop Grumman (NYSE:NOC)
  • Raytheon (NYSE:RTN)
  • Rockwell Collins (NYSE:COL)

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Fool contributor Rich Smith does not own shares of any company named above. The Fool has a disclosure policy.