At first glance, it looks as though General Dynamics (NYSE: GD) did everything the Street asked of it yesterday. Analysts wanted $7.5 billion in Q4 sales --and the General snapped to attention and delivered $7.5 billion (up 15% year over year). Analysts wanted $1.41 per share in profits -- and the company went above and beyond to produce $1.42, thanks in part to an operating margin that improved by 80 basis points.

But did Wall Street give General Dynamics a medal? Throw it a ticker-tape parade? Hardly. In fact, at one point yesterday, the stock was down nearly 3%. It took a revival in the stock market generally yesterday, and an upgrade to outperform from investment banker Wachovia today, to get the stock moving higher.

The problem, it seems, was not so much what General Dynamics did last year, as what investors feared it might do in the coming year. CEO Nicholas Chabraja's promise to earn between $5.55 and $5.65 per share in 2008 fell several pennies short of analyst predictions, and the midpoint of General D's estimate represented just 10% growth in projected profits.

Why so slow?
The General's deceleration in profits growth, it seems to me, has at its roots a slowdown in sales. As I described in our Foolish Forecast, General D's backlog simply isn't growing quickly enough for the company to maintain its sales pace of years past. A simple illustration of the dilemma: General Dynamics booked $7.5 billion in revenue last quarter. But it took in only $292 million in new orders. Therefore, new orders aren't coming in quickly enough to fill the gap created by old orders being filled.

Granted, that's just one quarter's picture of the situation. But the longer-term trend looks similar. Backlog grew 7% from the end of 2006 through the end of 2007; sales grew 13%. So again, sales are growing faster than backlog, and by necessity, this means that future sales must decline from today's frenetic pace.

Foolish takeaway
General Dynamics' sales trends should be uppermost in the minds of Foolish investors for one simple reason: The market generally prices defense contractors around one times the value of their annual sales. Lockheed Martin (NYSE: LMT), Northrop Grumman (NYSE: NOC), Textron (NYSE: TXT), L-3 (NYSE: LLL), and Boeing (NYSE: BA) all sell for between 0.85 and 1.05 times sales. The most notable exceptions right now are General Dynamics and Raytheon (NYSE: RTN), both of which fetch 1.2 times sales.

It seems to me that General Dynamics faces two key risks here. First, it's priced at a premium to the group. Second, the sales on which that premium stock price depends are slowing. Logically, slower sales growth will mean slower appreciation in the stock price -- and fewer investors wanting to own the stock. And if the trend in backlog worsens, and sales begin to decline -- it could be "look out below!"

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