Tailwinds Aid General Dynamics

Strong defense spending aside, General Dynamics may also be on the brink of seeing some good news come out of its Gulfstream business jet division. Even in the absence of a recovery in volumes, earnings are already improving dramatically thanks to cost cuts and the reduction in preowned aircraft losses. On an 8% increase in revenue, Gulfstream's operating profit more than doubled, as did the operating margin, which rose to 12.2% from 6.3% last year. Although there were no losses of used aircraft in the quarter, the company did sell four preowned jets at break-even, and Chabraja said that market has stabilized. More importantly, Chabraja said that demand for new aircraft is picking up. "New equipment orders could be super-heated in the third quarter. We're seeing a lot of activity," Chabraja said.

Free cash flow was quite strong in the quarter, coming in at $296 million, or 100% of net income, and up $20 million from the first quarter. General Dynamics' balance sheet remained rock-solid at the end of the quarter, with $900 million in cash and a debt-to-capital ratio of 38.3%, roughly flat with the first quarter.

It has been a good year so far for defense contractors like General Dynamics. But while the stock may no longer be cheap compared to other defense stocks, solid support for General Dynamics' defense programs combined with a recovery at Gulfstream could help the shares continue to perform well the rest of this year.