General Dynamics: Russian threat could boost defense revenue, but not immediately

General Dynamics could see higher combat vehicle revenue as European and American leaders react to threats in Eastern Europe, but that will take time to materialize, the company’s chief executive said today.

“I think it’s premature to bake in any assumptions about growth until you really see some of that,” Phebe Novakovic said on the company’s quarterly earnings call. “I would say that one of the interesting things, that we have not quite seen at the same level, is the Abrams interest from multiple U.S. allies.”

The perception of an elevated Russian threat will not immediately lead to increased defense budgets, and then there will be another wait until contract awards increase company revenues, she said.

“It takes time to get from the threat to full funding to allocation of awards,” Novakovic said. “I think you’ll hear that from a lot of folks, not just us.”

General Dynamics would receive much of a $6 billion weapons sale to Poland that the State Department approved in February, which includes 250 of the company’s M1 Abrams main battle tank.

The company’s ordnance business could also benefit from higher defense spending, Novakovic said.

“Should the recent threat environment drive increased funding in re-arming and recapitalizing land forces, we will see an increase in demand,” she said. “I expect it to be aligned along our ordnance business as well as our vehicle business, both in the United States and at [European Land Systems], but I’m careful not to get ahead of our customers here.”

The company has been able to manage increasing commodity prices without harm to operating margins, including through price increases and “contract architecture,” Novakovic said.

General Dynamics reported $9.4 billion in revenue for the quarter that ended March 31, a marginal increase over revenue in the same period a year earlier. Net earnings were $730 million, up 3.1%.

The combat systems segment, which builds the Abrams and other ground vehicles, saw $1.7 billion in revenue for the quarter, down 8% from last year. Operating earnings for the segment fell by 7%, to $227 million.

The marine systems segment, which builds submarines and destroyers for the Navy, made $2.7 billion in revenue, up 6.8% from a year earlier. Operating earnings rose by 5.5%, to $211 million.