For a while, it looked like 2015 would be a tough year for the defense industry. Military spending had begun to slow and profit margins were shrinking.
But in a series of reports recently, the industry showed that things may be turning around faster than expected.
“This is the mildest defense downturn on record,” said Loren Thompson, chief executive of think tank the Lexington Institute, and an adviser to several major defense contractors, including Lockheed Martin. “It’s the catastrophe that never happened.”
General Dynamics, maker of the Ohio- and Virginia-class of submarines and owner of commercial airplane manufacturer Gulfstream, reported a 5.5 percent jump in revenue Wednesday and that profits had jumped to $752 million.
Northrop Grumman, which makes the B-2 Spirit bomber and Global Hawk drones, reported a jump in profits despite declining revenue.
“The top line is getting less worse,” said Hunter Keay, managing director at Wolfe Research, where he analyzes defense and aerospace companies. “There’s a clear line of sight to top line growth in this industry for the first time in a couple years.”
Both companies beat analysts’ expectations and raised their revenue and profit expectations for the year. General Dynamics’ closed up just under 4 percent at $149 a share. Northrop’s stock rose 6 percent to $173.
This comes a bit more than a week after Bethesda-based Lockheed Martin, the world’s largest defense contractor, purchased helicopter maker Sikorsky, sending shock waves through the industry and reporting strong growth.
The defense contracting industry had expected a sustained downturn in defense spending this year amid delays to ambitious research and development plans as the federal budget faced repeated budget crises. So companies cut back on expenses and their headcount, Keay said.
But the threats posed by the Islamic State and in other global hotspots has kept contractors busier than expected, analysts said.
“There’s a pretty clear correlation between global threat levels and defense spending,” Keays said. “There’s a ramping willingness to be hawkish from the American public given the brutal behavior of terrorists overseas.”
In 2013, General Dynamics brought in current chairman and chief executive Phebe Novakovic to firm up the company’s finances.
“We were inwardly focused on improving our operations and retiring a considerable amount of risk that we found in the company,” she said on a Wednesday earnings call. “We did all of that.”
Now, she said, Falls Church-based General Dynamics is back on a growth trajectory while it continues to keep costs low. Its second-quarter results were helped by demand for its Gulfstream business jet and its naval work.
“I think you’re going to see more of the same,” she said. “Focus on the core, blocking and tackling. Might not be the sexiest thing, but boy, it really makes all the difference in performance.”
Falls Church-based Northrop’s aerospace division reported a slight increase in revenue.
“We believe we are well positioned to continue our successful 35-year partnership with U.S. Air Force on long-range strike systems,” Northrup chief executive and chairman Wesley Bush said on an earnings call. “Our B-2 bombers are combat-proven and we’ve been consistently upgrading and sustaining them.”