Why General Dynamics Emerges As The Superior Defense Stock?

Equity Markets and the Defense Sector: Navigating Turbulence and Opportunities

Introduction: Equity Markets and the Defense Sector

Equity markets have recently faced significant volatility, driven in part by escalating trade tensions and geopolitical uncertainty. The Dow Jones and the S&P 500 have both incurred substantial losses, with President Trump’s firm stance on tariffs contributing to the market downturn. Amid this instability, the defense sector has emerged as a focal point for investors seeking stability and growth. In this analysis, we compare two major players in the defense industry: General Dynamics (NYSE: GD) and Lockheed Martin (NYSE: LMT). While both companies are well-positioned to benefit from increased defense spending, our analysis suggests that General Dynamics offers a more compelling investment opportunity over the next three years, driven by its strong revenue growth, superior profitability, and attractive valuation.

Revenue Growth: The Engines of Expansion for GD and LMT

General Dynamics and Lockheed Martin have both demonstrated the ability to grow their revenues, but GD has outpaced its peer in recent years. From 2021 to 2024, General Dynamics achieved an average annual revenue growth rate of 7.5%, increasing its top line from $38 billion to $48 billion. In contrast, Lockheed Martin recorded a more modest average annual growth rate of 2.0%, with revenues rising from $67 billion to $71 billion over the same period. Notably, GD’s sales growth over the trailing twelve months (12.9%) far surpasses that of LMT (5.1%).

The growth drivers for both companies are rooted in their core business segments. Lockheed Martin’s revenue has been bolstered by higher production volumes of key programs, such as Sikorsky helicopters and missile systems, as well as increasing production contracts for the F-35 fighter jet and national security space initiatives. These programs are expected to continue benefiting from heightened geopolitical tensions, which are likely to sustain defense spending.

For General Dynamics, revenue growth is being fueled by strong performance across its business segments, including aerospace, marine systems, and combat systems. The aerospace division has been a standout performer, with increased aircraft deliveries, particularly the G700, which began shipping in Q2 2024 following regulatory approval. The company’s marine systems division is also driving growth through higher production volumes on submarine programs, while the combat systems division has seen increased sales due to the U.S. Army’s M10 Booker vehicle program. Together, these factors position General Dynamics for sustained revenue growth in the coming years.

Operating Margins: A Tale of Two Companies

While both General Dynamics and Lockheed Martin have experienced declines in operating margins between 2021 and 2024, the drivers of these declines differ significantly. Lockheed Martin’s operating margin dropped from 13.6% to 9.9%, primarily due to a $1.4 billion loss in its classified programs in 2024. This unexpected setback underscores the risks associated with certain high-stakes, classified projects.

In contrast, General Dynamics saw a more modest decline in operating margin, from 10.8% to 10.1%. This decrease was largely attributable to initial delivery costs associated with the G700 aircraft, which are expected to normalize as production scales up. GD’s ability to maintain relatively stable margins despite these near-term challenges highlights its operational resilience and efficient cost management.

Financial Risk Analysis: Debt, Cash, and Stability

In evaluating the financial risk profiles of General Dynamics and Lockheed Martin, both companies exhibit a relatively balanced approach to debt and cash management. Lockheed Martin’s debt-to-equity ratio stands at 19%, slightly higher than General Dynamics’ 15%, indicating greater leverage. However, Lockheed Martin also holds a more substantial cash reserve, with a cash-to-assets ratio of 4.5%, compared to GD’s 3%. This suggests that while Lockheed Martin may be more leveraged, it also has greater liquidity to navigate potential challenges.

General Dynamics, on the other hand, boasts a stronger debt profile, which could make it more attractive to risk-averse investors. Its lower debt-to-equity ratio reduces the company’s financial risk and improves its ability to weather economic downturns. However, its smaller cash reserve may limit its flexibility in pursuing strategic acquisitions or investments in the short term.

Stock Performance: A Comparative Analysis

Over the past four years, General Dynamics has significantly outperformed Lockheed Martin and the broader market. From early 2021 to now, GD’s stock has achieved an impressive 90% gain, rising from approximately $135 to $255 per share. This performance surpasses the S&P 500’s 55% gain over the same period. General Dynamics’ stock has also been less volatile, with positive annual returns in each year between 2021 and 2024 (44%, 22%, 7%, and 4%, respectively).

Lockheed Martin’s stock, by comparison, has delivered a more modest 45% gain, rising from around $315 to $450 per share. This performance lags behind the S&P 500’s 55% gain over the same period. LMT’s stock has also been more volatile, with annual returns of 3%, 40%, -4%, and 10% in 2021, 2022, 2023, and 2024, respectively. Lockheed Martin underperformed the S&P 500 in three of these four years, highlighting its relatively weaker performance.

Conclusion: General Dynamics as the Superior Choice for Defense Investors

Based on our comprehensive analysis, General Dynamics emerges as the more attractive investment option in the defense sector compared to Lockheed Martin. GD’s stronger revenue growth, improved profitability, and similar financial risk profile make it a compelling choice for investors. Additionally, GD’s valuation is more appealing, with its stock trading at 18.6 times trailing earnings, below its three-year average P/E ratio of 19.9. In contrast, Lockheed Martin’s stock is trading at a higher multiple of 20.1 times trailing earnings, slightly above its three-year average.

While General Dynamics offers a strong investment case, investors seeking a smoother ride may also consider the High-Quality Portfolio, a carefully curated selection of 30 stocks with a proven track record of outperforming the S&P 500. Regardless of the path chosen, the ongoing geopolitical instability and resulting defense spending trends position the sector for continued growth, making it a critical area of focus for investors.