General Dynamics Corporation's Best Contract in 2015

Introducing the G650ER, flagship of General Dynamics' fleet. Image source: General Dynamics.

With more than $13.6 billion in arms sales to the U.S. government annually (and $30.8 billion in total sales globally), General Dynamics ranks as the third-largest defense contractor in the United States. And yet, if you ask me which of the contracts General Dynamics won this year was its "best," I think you'll be surprised by my answer.

It wasn't, for example, the $92 million contract General Dynamics won just this past week, to upgrade M1A2 Abrams main battle tanks for the U.S. Army. That contract was a big shot in the arm for General Dynamics, which every year faces the dilemma of shutting down tank production at its Lima, Ohio, factory if insufficient orders materialize -- but it wasn't the year's best contract even so.

Nor was it the $610 million award from the Pentagon that instructed General Dynamics to build a new Arleigh Burke-class destroyer for the Navy. Marine Systems business brings in $7.3 billion for General Dynamics annually, sure. But at an average operating profit margin of just 9.6%, those revenues are far from General Dynamics' most profitable.

In fact, if you ask me, General Dynamics Corporation's best defense contract of 2015 wasn't even a defense contract at all.

Drumroll, pleaseNo, for my money, the "best" contract General Dynamics won in 2015 was the one it won in May -- from Qatar Airways.

General Dynamics announced the deal in question on May 19, 2015, and it was a big one any way you look at it. Building on a Memorandum of Understanding first signed last year, Qatar Airways' Executive airline service agreed to buy a mix of up to 30 G500, G600, and G650ER business jets.

Each of these jets -- including three of the top four of General Dynamics' top-of-the-line models, is capable of carrying up to 19 passengers at speeds approaching Mach 1, and for distances of 5,000 to 7,500 miles on a single tank of fuel. They're fancy jets -- but they don't come cheap.

Although General Dynamics did not name a price for the contract, publicly available data suggests they could run as high as $43.5 million (for the G500) to $54.5 million (G600) to $66.5 million for the flagship G650ER. Average that out, and we're probably talking $1.3 billion minimum -- and probably closer to $1.65 billion.

Good, better, bestThe real kicker though, and the factor that really puts this Gulfstream contract over the top in my book, and makes it the "best" contract of General Dynamics' year, is where these revenues end up: namely, General Dynamics' Aerospace division.

According to data from S&P Capital IQ, Aerospace is only General Dynamics' second-biggest business division, accounting for 28% of all revenues collected in a year. But Aerospace is far and away the company's most profitable division, producing operating profit margins of 18.6% -- versus an overall companywide profit margin of 13.1%.

Result: Assuming the Gulfstream sale produces something close to the $1.65 billion in revenues I've estimated, profits from that sale could easily exceed $300 million -- or more than $1 for every share of General Dynamics now outstanding. That's a big deal.

And for me, it makes the Qatar Airways sale General Dynamics' best deal of 2015.

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Rich Smithdoes not own shares of, nor is he short, any company named above. You can find him onMotley Fool CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 308 out of more than 75,000 rated members.The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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