Equity markets experienced a significant downturn amid escalating trade tensions, with both the Dow Jones and the S&P 500 incurring substantial losses. The market sell-off was triggered by President Trump’s firm stance on tariffs. In our analysis of defense sector stocks, we identify General Dynamics (NYSE: GD) as a more attractive investment opportunity than Lockheed Martin (NYSE: LMT). Presently, both stocks are valued at roughly 17x forward earnings. Nevertheless, our analysis indicates that GD is likely to outperform LMT in the upcoming years, propelled by its robust revenue growth trajectory and superior profitability metrics.
This evaluation is based on a comprehensive analysis of several key factors, including historical revenue performance, investment returns, and comparative valuation metrics. In the analysis that follows, we will explore in greater detail the reasons behind our belief that General Dynamics is a more attractive investment option in the defense industry over the next three years. However, if you prefer an option that offers a smoother ride compared to an individual stock, consider the High-Quality portfolio, which has outperformed the S&P and delivered >91% returns since inception.
The Engines of Growth: How GD and LMT Are Increasing Their Sales
General Dynamics recorded an average annual revenue growth of 7.5% from 2021 to 2024, increasing from $38 billion to $48 billion. In contrast, Lockheed Martin achieved an average annual growth of 2.0%, with its revenue rising from $67 billion to $71 billion during the same period. Additionally, over the trailing twelve months, General Dynamics’ sales growth of 12.9% significantly surpasses Lockheed Martin’s 5.1%.
Higher production volumes in critical programs, including Sikorsky helicopters and missile systems, have driven the growth of Lockheed Martin’s revenue in recent years. Moreover, increasing production contracts for the F-35 and national security space programs are significantly boosting sales. We expect this growth trend to persist, bolstered by ongoing geopolitical instability that is likely to sustain defense spending.
General Dynamics’ revenue is supported by strong performance across its core business segments. The aerospace division is a significant contributor, with increased aircraft deliveries, especially the G700, which started shipping in Q2, 2024 following regulatory approval. The company’s marine systems are also driving growth through higher production volumes on vital submarine programs. In addition, the combat systems division has experienced increased sales due to the U.S. Army’s M10 Booker vehicle program.
Operating Margin Trends: LMT’s Classified Losses Versus GD’s G700 Costs
Between 2021 and 2024, Lockheed Martin saw its operating margin decline significantly, dropping from 13.6% to 9.9%, primarily because of a $1.4 billion loss in its classified programs in 2024. In comparison, General Dynamics experienced a more modest decrease in operating margin, from 10.8% to 10.1%, as a result of the initial delivery costs for the G700 aircraft.
Financial Risk Analysis: Balancing Debt and Cash in Defense Stocks
In evaluating financial risk, both General Dynamics and Lockheed Martin exhibit a relatively balanced profile. While Lockheed Martin’s debt-to-equity ratio is 19%, which is higher than General Dynamics’ 15%, indicating slightly greater leverage, General Dynamics’ cash-to-assets ratio of 3% is lower than Lockheed Martin’s 4.5%, implying a smaller cash reserve. Essentially, General Dynamics has a stronger debt profile, whereas Lockheed Martin holds a more substantial cash position.
GD and LMT: A Comparison of 4-Year Stock Returns Against the S&P 500
From early 2021 until now, General Dynamics’ stock has achieved an impressive 90% gain, increasing from roughly $135 to $255, thereby outperforming the S&P 500’s 55% gain over the same four-year span. Although GD posted positive annual returns throughout this period—44% in 2021, 22% in 2022, 7% in 2023, and 4% in 2024—it lagged behind the S&P 500 in 2023 and 2024.
In contrast, Lockheed Martin’s stock has risen by 45%, moving from approximately $315 to $450, which is below the S&P 500’s 55% gain. LMT’s performance was characterized by considerable volatility, with annual returns of 3% in 2021, 40% in 2022, -4% in 2023, and 10% in 2024. As a result, LMT underperformed the S&P 500 in 2021, 2023, and 2024. As an aside, amid increased economic uncertainty, and investors possibly becoming more defensive, see Kimberly-Clark Stock: Navigating Margin Growth And Market Challenges.
GD Stock: The Superior Defense Investment Choice?
Our analysis indicates that General Dynamics is the more attractive investment when compared to Lockheed Martin. GD shows stronger revenue growth, improved profitability, and a similar financial risk profile. Additionally, its valuation is more appealing. At present, LMT stock is trading at 20.1 times its trailing adjusted earnings of $22.31 per share, which is slightly above its three-year average P/E ratio of 19.6. In contrast, GD stock is trading at 18.6 times its trailing earnings of $13.63 per share, falling below its three-year average P/E ratio of 19.9. While the current geopolitical climate is favorable for the entire defense sector, General Dynamics’ anticipated top-line growth, driven by the G700 aircraft, along with its marginally higher profitability, solidifies our preference for GD.
Although General Dynamics offers a strong investment case compared to Lockheed Martin, the High-Quality Portfolio, a carefully selected list of 30 stocks with a proven record of outperforming the S&P 500 over the last four years, provides another appealing option.
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