After charging ahead 7% in response to a bumper crop of profits Wednesday, shares of defense contractor General Dynamics (NYSE:GD) beat a hasty retreat yesterday and left nearly half of their gains upon a battlefield littered with the corpses of several NYSE comrades. Should Foolish investors view the pullback as a chance to rifle through the bodies for loose change and cheap shares? That's what we're here to find out.

Despite the post-earnings bump, we're still looking at a stock priced 4% cheaper than when I warned against buying it three months ago. Yet by all indications, General Dynamics is firing on all cylinders and even better positioned at the end of Q2, than it was at the end of Q1:

  • Sales are up 11% for the quarter and for the first half of this year.
  • Profits rose 27% for the quarter, just a whisker shy of last quarter's 30% pace.
  • The operating margin rose in all four business segments -- 12.5% on average. That's superior to margins at defense-contracting rivals Northrop Grumman (NYSE:NOC) and Boeing (NYSE:BA), and it's closing in on what more diversified industrial giants, including Textron (NYSE:TXT) and Honeywell (NYSE:HON), earn.
  • Free cash flow more than tripled in Q1, year over year. At more than $1.2 billion year to date, first-half 2008 free cash flow is running 66% ahead of the comparable performance from a year ago.

What's more, far from taking a breather, General Dynamics is revving its growth engine. Management puts the total backlog of work in its pipeline north of $55 billion, which means the General is booking new orders more than twice as quickly as it's fulfilling the old. Nor need you worry that a change in administration at the White House will cut into the General's stipend. Funded backlog is rising even more rapidly than total backlog -- up 28% year over year.

Yet for all this, I still don't own the stock myself, despite having loaded up my shopping cart with other defense contractors over the past several months. Why not?

Valuation
Down 4% over the past three months, General D's stock is headed in the right direction from a prospective buyer's point of view. But with its price-to-earnings ratio of 16, and its price-to-free cash flow ratio of 12, the shares still don't look attractive when weighed against projections of sub-10% long-term growth.

On the other hand, if backlog keeps growing at its present torrid pace and growth estimates get kicked higher as a consequence ... well, then we just might have found ourselves a buy thesis, Fools.

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