Why General Dynamics Is a High-Conviction Buy for Long-Term Investors

In an era of economic uncertainty, defense and aerospace stocks have emerged as rare havens of stability and growth. General Dynamics (NYSE: GD) stands out as a prime example of a company leveraging sector resilience, strategic R&D investments, and a robust backlog to deliver compounding returns for long-term investors. With the U.S. defense budget surging past $1 trillion in 2025 and aerospace demand driven by technological innovation, GD's financial performance and operational execution position it as a high-conviction buy.

Financial Performance: A Blueprint for Compounding

General Dynamics' third-quarter 2025 results underscore its ability to generate consistent, accelerating returns. Revenue hit $12.9 billion, a 10.6% year-over-year increase, while diluted earnings per share (EPS) rose 15.8% to $3.88, outpacing both industry benchmarks and analyst expectations. Operating earnings grew 12.7% to $1.3 billion, with operating margins expanding to 10.3%, reflecting disciplined cost management and pricing power.

The Aerospace segment, in particular, has become a growth engine. Revenue surged 30.3% to $3.23 billion, driven by strong demand for business jets and a book-to-bill ratio of 1.3-to-1. Operating margins expanded by 100 basis points to 13.3%, a testament to the segment's efficiency and pricing resilience. CEO Phebe Novakovic highlighted this segment's "impressive execution," noting its role in securing a 10-year runway for growth through a $109.9 billion contract backlog according to company reports.

Sector Resilience: Government Spending and Technological Momentum

The defense and aerospace sector's resilience in 2025 is underpinned by unprecedented government spending. The U.S. defense budget for FY2025 reached $849.8 billion, with additional funding from the "Big Beautiful Bill" pushing total allocations above $1 trillion. This includes $29 billion for shipbuilding, $25 billion for munitions, and $25 billion for the "Golden Dome" missile defense system, all of which directly benefit GD's Marine Systems and Combat Systems segments.

Moreover, the sector is undergoing a technological renaissance. R&D investments in AI, hypersonic weapons, and space systems are accelerating, with aerospace accounting for 71% of sector jobs according to industry analysis. General Dynamics is at the forefront of this shift, allocating $565 million in 2025 to R&D initiatives focused on artificial intelligence, cyber capabilities, and digital transformation. These investments align with the U.S. military's push for modernization, ensuring GD remains a critical supplier of advanced defense solutions.

Strategic Contracts and Long-Term Visibility

GD's ability to secure high-margin, long-term contracts further cements its compounding potential. In May 2025, the company won a $1.5 billion enterprise IT modernization contract for the U.S. Strategic Command (STRATCOM), integrating AI and hybrid cloud systems to enhance strategic deterrence. Similarly, General Dynamics Information Technology (GDIT) secured an $850 million contract to modernize U.S. Special Operations Command (SOCOM) infrastructure, expanding its footprint in high-technology defense projects.

These contracts not only provide immediate revenue but also lock in future cash flows. GD's total contract value now stands at $167.7 billion, with a backlog of $109.9 billion offering a clear path for sustained earnings growth. The company's operating cash flow of $2.1 billion in Q3 2025-199% of net earnings-demonstrates its ability to convert revenue into capital for reinvestment or shareholder returns.

Why Long-Term Investors Should Act

For investors seeking compounding returns, General Dynamics offers a rare combination of sector tailwinds, operational excellence, and strategic foresight. The defense and aerospace industries are insulated from macroeconomic volatility due to their reliance on government spending, which is projected to grow as global tensions persist. GD's focus on R&D and long-term contracts ensures it remains a key player in this evolving landscape.

With a backlog exceeding $100 billion and a history of margin expansion, General Dynamics is poised to deliver consistent earnings growth and capital appreciation. For long-term investors, the company represents a durable, high-conviction opportunity to capitalize on the compounding power of sector resilience and technological innovation.