Bush's ultimatum yesterday finally set fire to shares of General Dynamics(NYSE: GD), which surged more than 6% yesterday and another 2%-plus today to around $57 and change.

But even at today's price, this leading defense contractor is still well below its levels in late January, when the stock was around $65 and already appeared to offer strong value.

General Dynamics' big jump over the past two days comes after about six weeks of share-price weakness due to lackluster demand in its Gulfstream aviation division, along with a temporarily rising view that a war with Iraq might be avoided entirely. These bearish views caused the stock to fall as low as $50 at one point last week.

It's hard to understand why, after years of Saddam's resistance to disarmament, anyone would've thought this war could be avoided. Nevertheless, last night's presidential address put all doubts to rest. Suddenly, everyone is returning to the view that defense spending is likely to be heading higher in the years ahead. After all, Iraq isn't the only geopolitical threat to peace.

In General Dynamics' 2000 annual letter to shareholders, CEO Nicholas Chabraja described the state of defense spending as having just endured "a decade-long procurement holiday." He also presciently pointed to "post-Cold War threats that are only beginning to come into focus." This combination of insufficient past defense spending and new military threats has combined to create the environment we're in now, where defense spending has a strong tailwind for the foreseeable future.

Somehow, though, General Dynamics' shares don't reflect this bullish backdrop. The most visible culprit is weakness in the company's Gulfstream division, where economic weakness is weighing heavily on demand for corporate jets. This has hurt the company's near-term earnings outlook, which has fallen about 10% over the past three months.

Nevertheless, with $5 in earnings per share expected for 2003, General Dynamics trades for a low 11.5 times forward earnings. Plus, the company recently increased its dividend for the sixth year in a row, ratcheting up the yield to about 2.2%. If the stock looked good at $65, it looks great at $57.