Tailwinds Aid General Dynamics

But the big story was with the company's operating margin, which jumped 80 basis points year over year to 10.4% and was up 50 basis points sequentially from the first quarter despite a similar sales level. On the company's second-quarter conference call, Chairman Nick Chabraja mainly credited the Information Systems unit for turning in a better-than-expected performance thanks to a smoother integration of last year's third-quarter acquisition of Veridian. Indeed, Information Systems' margin of 11.4%, while down from last year's pre-Veridian level of 12.2%, was up sequentially from 9.9% in the first quarter and well ahead of management's guidance of just 10%.

And while the debate continues over whether growth in the defense budget is sustainable, the anecdotal evidence seems to support those in the camp who see no peak in spending before 2006. And within that favorable backdrop, General Dynamics appears to be grabbing its fair share of the pie.

According to a report last week by Jeffries analyst Gary Liebowitz, the House-Senate conference committee approved a fiscal 2005 defense spending bill that includes $147.6 billion in military investments (the procurement and research, development, testing and evaluation accounts that are most important for contractors). That's at least several percentage points above the president's initial request in February.

General Dynamics, Liebowitz wrote, seemed to benefit the most from the higher spending. For example, Congress seems ready to approve $625 million more for a seventh Stryker brigade. Chabraja said that the Stryker was doing well in Iraq and that Congress was likely to add even more to the program than General Dynamics had anticipated in its own internal plans.