Against Odds, GD Outlook Brightens

For the last several years, General Dynamics chairman Nicholas Chabraja has faced a peculiar problem. It’s the kind of problem only successful people have. After a decade of continuously increasing earnings at GD, Chabraja’s name had become synonymous with shareholder value in the defense business. And since he was compensated mostly in stock, Chabraja had benefited handsomely from the success his tenure brought to the company (revenues increased from $4 billion to $30 billion). But he couldn’t stay in the top management job forever. Hence the problem: how do you retire when your fortune is mostly in company stock, but shareholders think having you in the top job is the main reason the stock is worth holding?

When Chabraja relinquished the chief executive officer’s title to former Chief of Naval Operations Admiral Jay Johnson on July 1 of this year, investors were apprehensive. They knew that Johnson had been a success in the private sector, rising to become CEO of Dominion Virginia Power, and that he sat on GD’s board. They also knew he once ran GD’s biggest customer, the U.S. Navy. But how could he deliver for shareholders the way Chabraja had? Nobody else in the defense sector had a track record that good, so the odds didn’t look encouraging.

After Johnson’s first three months on the job, though, the odds are looking a lot better. While storm clouds gather over the rest of the defense sector, GD is going gangbusters. Changes in Navy shipbuilding plans look likely to greatly benefit GD’s New England shipyards even as they cut the revenue outlook at rival shipbuilder Northrop Grumman. Army modernization plans are heavily favoring the company’s Stryker medium armored vehicle, while being less kind to competitor BAE Systems. And now respected Morgan Stanley aerospace analyst Heidi Woods is overweighting GD stock on the forward strength of the company’s Gulfstream high-end business jets.

That last item is especially ironic, because as weapons spending is beginning to weaken, analysts are counseling military contractors not to diversify out of what they know. Yet Gulfstream, a purely commercial operation, seems to be GD’s ace-in-the-hole if Pentagon spending really goes sour. Clearly, Nick Chabraja’s contrarian approach to the sector will continue paying dividends long after he departs for new pursuits. In the meantime, though, from his new role as non-executive chairman, he has put together a corporate succession that looks likely to be seamless in terms of shareholder returns. Who could have imagined that would be possible in this environment?