General Dynamics

General Dynamics' second-quarter revenue grew 8.1% to $14.1 billion, while operating profit again rose 12% to $1.46 billion since the year-ago quarter. Continuing the trend from late in 2025, brisk jet deliveries and submarine construction progress drove revenue and margin growth.

Why it matters: We admire General Dynamics' portfolio of wide-moat franchises and expect its defense businesses to deliver mid-single-digit profit growth for the foreseeable future, with some business lines, including submarines and Gulfstream, slated to offer slightly faster growth. Aerospace revenue outpaced our expectations in the quarter by $350 million, as improved throughput from the supply chain unlocked acceleration in the pace of deliveries, including three more large cabin jets in the quarter than we anticipated at very high incremental margin. The company's total backlog now stands at a record $136.5 billion, more than two years' worth of revenue, and up 16% from the end of December. We see the backlog as a sign of customers' confidence in General Dynamics' ability to serve their needs, including European NATO governments shopping for land systems manufactured on their turf.

The bottom line: We've raised our fair value estimate for wide-moat General Dynamics to $407 per share from $379, partly due to the time value of money and after tweaking our medium-term profitability forecast slightly upward for the Gulfstream business.

Our fair value estimate of $407 per share reflects our forecast of accelerating Gulfstream sales and submarine production in the next few years. Our discounted cash flow-based fair value estimate implies a price to 2026 earnings multiple of 24 times and an enterprise value to estimated forward EBITDA multiple of 17 times.

We think top-line growth will average 4.7% on a compound basis over 2026-30, with the primary sources of that growth in the aerospace and marine segments. In aerospace, we expect continued growth from the introduction of the G700, G800, and G400 aircraft. We see ramping up development of the Columbia-class submarine and incremental deliveries of Virginia-class subs driving growth in marine.

We expect operating margin will normalize at 11.7%, about 1.3 points above the trailing five-year average. There are significant commonalities between the G700 and G800, as well as the G400, G500, and G600 aircraft, which should improve margins over time, while we expect less margin expansion opportunity in the firm's more mature defense business lines.

We expect a relatively stable effective tax rate, settling around 17% in a normalized period.

In 2022 and 2023, increased spending was related to the company building out capacity for the Columbia-class submarine and new Gulfstream models. Although we don’t think that the company will need to add capacity for this into perpetuity, as these boats are produced quite slowly, we see it pursuing opportunities to build capacity in munitions and technology infrastructure, among other areas. Indeed, the company has immediate opportunities to invest in a few areas of the business, and promises several years in which capital expenditure will add up to 3% or more of sales, after which we forecast they will moderate to around 2% of sales.

Because General Dynamics faces some revenue cyclicality in the business jet segment, we apply an above-peer cost of equity, and because of its topnotch balance sheet, we use a low cost of debt. The result is a 7.9% weighted average cost of capital.

We assign General Dynamics a Morningstar Economic Moat Rating due to its intangible assets and customer switching costs.

We observe that wide moats are prevalent in the defense industry. We believe significant intangible assets driven by extreme product complexity thwart new entrants, and switching costs for risk-averse customers stem from the mission-critical nature of the products, often decades-long product lifecycles, and the prohibitive time and cost of switching suppliers. These dynamics apply to General Dynamics’ marine, combat, and mission systems business lines, representing at least 58% of revenue and profits. The firm routinely earns returns on invested capital in the high teens, practically double our 7.9% cost of capital estimate, and we forecast it to continue to do so for decades.

We believe incumbent firms are best positioned to meet the military's need to purchase arms (broadly defined). Arms production requires specialized expertise and usually lacks commercial viability outside of defense (aside from commercial aerospace), so new entrants would need to develop know-how from the ground up. We observe only a few capable incumbents in each major category of defense systems development. SIPRI's arms industry ranking further evinces limited competition: Lockheed Martin, Boeing, BAE Systems, RTX, Northrop Grumman, Airbus, and General Dynamics have remained the top six or seven global arms producers for the past 15 years.

General Dynamics makes a wide range of military vehicles, intelligence-gathering and communication systems, radars, sensors, and munitions. Product development lasts years to decades, and if the military is dissatisfied with a product, it's faster and easier to work with the existing contractor to fix it than to fund an alternative. We view products with the longest procurement cycles, like tanks and submarines, as the moatiest, since they provide extraordinarily long-term revenue and profit visibility. We view short-cycle products such as defense IT contracting less favorably. Further, the military's ability to succeed while protecting soldiers' and civilians' lives is contingent on these products working as intended, which we think protects proven suppliers from competition.

We believe the marine segment enjoys one of the widest moats in the defense industry. It benefits from steady, decades-long procurement cycles, and outfitting the nuclear reactor chamber of submarines is a rare capability even among defense contractors. To preserve this know-how at the only two facilities in the US that can, the Navy splits work on its subs (as well as conventional destroyers) between HII and General Dynamics, absorbing slightly more than half of the US Navy’s surface combatant and submarine budget. As the Navy plans to buy Columbia-class boats through 2042, we remain confident of the cash flow-generating capacity of the segment even without considering future contract wins.

We think the IT services business, accounting for about 17% of company revenue, has a narrow moat. It takes people with specialized technical skills, often combined with security clearances, to service these contracts, and we see intangible assets from implementing and integrating complex networked systems for government agencies. However, the rapid evolution of data processing, cybersecurity, and intelligence services, and their shorter contracting cycles, don't beget a wide moat. As evidence, several pure-play defense IT contractors exist, including Leidos, Booz Allen Hamilton, CACI, and SAIC, as well as segments of other prime contractors. Further, government IT contracts are recompeted periodically, which likely drives returns closer to cost of capital.

General Dynamics’ aerospace segment makes and services Gulfstream business jets and has a wide moat based primarily on the intangible asset of aircraft-manufacturing complexity. The business jet market is a little more fragmented than the duopoly commercial aircraft market, but product complexity ensures that only Gulfstream, Bombardier, and Dassault compete in the long-range, large-cabin end of the business jet market. This market comprises only about 700 deliveries annually (roughly 200 of which are long-range, large-cabin) and new, high-quality products generally drive demand, as previous customers must be convinced to upgrade. General Dynamics' aerospace division has outpaced competitors in terms of revenue and margins, taking substantial volume share in the large-cabin segment and now has about half of total deliveries, which we see as evidence of the high incremental returns available to Gulfstream as it invests in new jet models. Vis-à-vis Bombardier, Gulfstream has deeper pockets to fund such investments and a larger payoff opportunity. The company consistently generates superior margins to competitors, likely because it is further along the learning curve. Gulfstream has an extensive global product support network, which creates a sticky stream of aftermarket revenue, representing about one-fourth of segment sales.

A risk to General Dynamics' economic moat exists in the remote possibility of a significant lapse or error in its government contracting or production processes that could exclude it from delivering key defense systems. More broadly, if a malfunction, breach, or vulnerability of one of the company's systems jeopardized military readiness, security, or capability, or caused casualties, it would represent a product governance failure and could breach the moat if it led to exclusion from a major program family or suspension from federal contracting. No single program represents more than 10% of our forecast returns, so we don't model it into our forecast.

The Gulfstream franchise has top-tier volume share and margins in the large end of the business jet market and has successfully introduced new models such as the G700.

General Dynamics' marine segment has decades of revenue visibility, thanks to shipbuilding's long cycle.

Defense prime contractors operate in an acyclical business, which could offer some protection if the US enters a recession.

General Dynamics depends on US military funding, which is an inherently political and thus uncertain process.

General Dynamics' C5ISR, ground vehicles, and IT services exposures are somewhat shorter-cycle offerings relative to big-ticket defense procurement items like submarines.

Investors looking for double-digit growth in revenue or earnings should look elsewhere, as defense spending over the long haul is mature and stable.