He said the big arms makers were “a bit fat and happy” after 15 years of growing budgets, and could probably expand the cost-cutting efforts they had already begun, which would allow them to maintain good profit margins despite pressure on revenues.
“They have not seen lean by comparison to what goes on in the commercial world,” Stallard said. “There’s definitely more that could be done there.”
Lockheed, Boeing Co’s (BA.N) defense division, Northrop Grumman Corp (NOC.N) and Raytheon Co (RTN.N) this week beat analyst forecasts with higher earnings and solid margins despite weakening sales.
General Dynamics missed forecasts due to a one-time charge, although maintained its guidance for full-year earnings at roughly the same level, assuaging investors’ concerns.
The big companies, eager to shore up investor support, say they remain focused on consolidating facilities, cutting jobs and improving productivity to maintain margins. They also highlight the big backlogs they have.
Margins reported by the top five defense companies ranged from 10.5 percent in Boeing’s defense business to 13 percent at Raytheon, for an average around 11.5 percent.
Those margins are higher than they were in the 1990s, but still far below margins seen in the commercial world, where technology companies shoulder research and development costs on their own instead of relying on government funding, and must recoup those costs.
Another plus: Most big defense companies are aggressively pursuing international orders, which generally have higher profit margins, said Jason Gursky, an analyst at Citi Research.
Many companies also have weapons programs that are transitioning from development to production, which generally results in more predictable outlays and better returns, he said.
“It’s not that they’re outperforming per se, but they’re moving into higher-margin activities and that trend is likely to continue for a while,” Gursky said.