General Dynamics, Northrop Top Estimates on Margin Gains

General Dynamics Corp. and Northrop Grumman Corp. beat analysts’ earnings estimates, buoyed by cost cuts that bolstered margins, while they await a possible rebound in U.S. military spending.

The companies said they boosted profitability in operating segments to counter sluggish sales after four consecutive years of falling arms budgets. Now, amid global instability that includes U.S. strikes against Islamic State militants, lawmakers are signaling they may reconsider plans for further reductions.

“They cut costs in anticipation of this downturn,” said Richard Aboulafia, an aerospace consultant with Fairfax, Virginia-based Teal Group. “Given the shifting political winds, it’s likely that the downturn isn’t even going to be as severe as feared.”

General Dynamics and Northrop both raised 2014 profit forecasts today and exceeded analysts’ quarterly projections. Lockheed Martin Corp., the largest U.S. defense contractor, topped third-quarter profit estimates yesterday, in part because of a boost from pension adjustments.

General Dynamics rose 2 percent to $126.31 at the close in New York, while Northrop fell 0.8 percent to $125.11. Both companies are based in Falls Church, Virginia, and rank third and fifth in Pentagon contracting, according to data compiled by Bloomberg Government.

Quarterly Earnings

Quarterly profit at General Dynamics of $2.05 a share topped the average analyst estimate of $1.91, while Northrop’s $2.26 compared with a projection of $2.13, according to data compiled by Bloomberg.

General Dynamics’ Gulfstream luxury-jet unit helped increase quarterly profit, along with rising sales at the Combat Systems division, whose products include the Abrams main battle tank. Northrop benefited from a legal settlement as well as the segment margin gains.

With the U.S. winding down the war in Afghanistan, weapons makers have increasingly relied on large contracts to sustain earnings, including Lockheed’s $398.6 billion F-35 Joint Strike Fighter program. Northrop, the prime contractor on the B-2 Spirit stealth bomber, is poised to vie with Lockheed and Boeing Co. for the U.S. Air Force’s planned long-range strike aircraft, a potential $55 billion project that will be decided next year.

Defense companies have also focused on reducing expenses to improve profit. General Dynamics raised its operating margin by 0.5 percentage point to 12.9 percent; Northrop increased its segment operating margin to 14 percent from 12.5 percent.

Good Execution

“The execution’s been good,” Cai Von Rumohr, an analyst at Cowen & Co., said in an Oct. 20 interview. “All these guys have been delivering solid results in line or a little bit better than expected.”

Boeing, the second-largest U.S. contractor, also said today that operating margins improved in its defense unit, rising 2.4 percentage points to 10.8 percent.

U.S. lawmakers including Representative Peter King, a New York Republican, have suggested that military conflicts including bombardments of Islamic State strongholds could last for years and prompt Congress to reassess planned cuts in defense spending. The airstrikes in Syria and Iraq added to escalating global tension that includes U.S.-led sanctions on Russia over its support of Ukrainian rebels.

“There’s thinking that because of ISIS, people may see some uptick in some areas relative to what the prior expectations were, particularly intelligence,” Von Rumohr said, using one of the acronyms for Islamic State.

The Pentagon recently authorized Raytheon Co. to resume assembling warheads designed to intercept intercontinental ballistic missiles from countries such as North Korea and Iran. Waltham, Massachusetts-based Raytheon reports third-quarter earnings tomorrow.

A Bloomberg Intelligence gauge of the four largest Pentagon contractors -- excluding Boeing, whose civilian jets business accounts for most of its sales -- has climbed 17 percent this year, beating the 0.8 percent decline in the Standard & Poor’s 500 Industrials Index. The four companies each hit record stock highs last month.

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