WASHINGTON — Last month, General Dynamics withdrew from the US Army's Rifleman radio competition, just shortly after the company left the competition for the T-100, the T-X trainer replacement program based on the Alenia Aermacchi M-346 design.

Dropping out of two high visibility, and potentially lucrative contracts could be seen as a retrenchment for General Dynamics, but Wall Street analysts said the moves instead indicate the strength of the company's position.

Myles Walton, a research analyst with Deutsche Bank, said General Dynamics had made a conscious decision to focus on projects with higher profit margins.

"I think they're relatively positive developments in terms of management being able to make the decision" to focus on programs with better rates of return, Walton said. "It's a good thing to say 'no' every once in a while."

Asked if GD had grown more selective about the proposals it bids, a spokesperson for the relevant business unit, General Dynamics Mission Systems (GDMS) said it "continues to carefully consider any program we bid to ensure we add value to the solutions we offer our customers."

These moves should not be interpreted as a turn away from defense, said GD's corporate spokesperson, Lucy Ryan. In 2014, 58 percent of the company's revenues were from the US government and 11 percent were from non-US defense customers.

Ryan pointed to GD's receipt of a $17.6 billion award from the US Navy for the construction of 10 additional Virginia-class submarines, a $10 billion award from the Canadian government to provide military and commercial vehicles, training, and support services, and a £3.5 billion (US $5.4 billion) award to deliver 589 Scout SV platforms to the British Army.

Along with Thales, General Dynamics C4 Systems had already sold more than 21,000 Rifleman radios to the Army via two low-rate production orders. Earlier tThis year, the Army released its request for proposals for the handheld radio system, stressing its desire for increased competition to create a marketplace where multiple vendors could fill smaller orders. Ultimately, the Army foresees buying more than 193,000 units.

Particularly in information services and technology (IS&T), General Dynamics is well-positioned to seek out higher profit margins, Walton said.

"The criteria for returns on investment in that unit are probably higher than they would be for other businesses," Walton said. "They want to look up, they don't want to look down."

In a note to investors about General Dynamics published under the headline, "A good time to revisit the bull thesis on GD," Walton concluded that the company's defense businesses all have potential revenue growth for 2015.

"IS&T margins were once sustainably in the 11 percent range before falling to 8 percent and now bouncing back to 9 percent this year," Walton wrote. "We are getting more confident that the margin trajectory won't stop at 9 percent as the company has both restructured/simplified the internal structure of IS&T and also made some tactical moves to not bid on projects where revenue upside doesn't justify the economics."

For its part, GDMS said it did not bid the current program of record AN/PRC-154 and 154A Rifleman radio.

"We do continue to support the currently fielded Rifleman radios as well as invest in the radio's future design based on soldier feedback," the GDMS spokeswoman said. "It is important to note that the Army's new Rifleman radio acquisition strategy allows radio vendors to offer new radios with enhanced capabilities at regular intervals."

Mike Blades, an analyst with Frost & Sullivan who focuses on trainer aircraft, said General Dynamics may have walked away from the T-X competition because of a crowded field of competitors, reducing its their chance of winning.

"They pulled out because they didn't think it would win," Blades said. "I don't think it spells any weakness in the company."

With government budgets facing downward pressure, defense contractors risk spending a lot of money on research and development with low possible returns when they move beyond their core businesses where their expertise and experience create a competitive edge, he said.

"With the budget the way it is, companies have to make interesting choices," Blades said. "If they don't have a really strong business case for this competition, or something that's going to give them a leg up, they don't want to spend money in a possible losing effort."

Byron Callan, a director with Capital Alpha Partners, cautioned not to read too much into the withdrawals.

"I wouldn't read into it as General Dynamics has suddenly become less interested in defense, and there's somehow a lot less room to take on risk," he said. "It may have been just two instances where GD management felt they weren't being competitive."

In the trainer competition, GD may have felt that its older design couldn't compete with a clean-sheet design built around the requirements for the new aircraft, Callan said. With the Rifleman radio, Harris Corp. provided stiff competition with its commercial approach to the project, he said.

"I don't know if [the withdrawals should be seen as General Dynamics] being disciplined as much as being realistic," Callan said.

The GDMS spokesperson explained that its program management skills initially appeared to provide added-value, when the T-X program was an off-the-shelf airplane. However, the program moved to a more engineered trainer, and in late 2014, the company decided to pull out because it, "no longer believed that the value proposition existed."

General Dynamics repurchased $3.4 billion in common stock in 2014, and earlier this year the company's board approved the repurchase of another 10 million stocks. In March, the board of directors increased the company's quarterly dividend by 11.3 percent to $0.69 per share, representing the company's 18th consecutive annual dividend increase.

One Wall Street defense analyst who preferred not to speak for attribution noted that companies can create a lot of value by buying back stock and keeping their best programs.

If you keep less skin in the game, but get some margin on topline, that's very advantageous, he noted. Defense firms are being rewarded for higher profitability on smaller projects, and many in the industry are chasing programs where they have the biggest advantage to leverage with the Defense Department, he said.

GD's CEO Phebe Novakovic said on the fourth-quarter 2014 earnings call that over the last few years, the company anticipated deploying all of its free cash flow in share repurchases and dividends, and anticipated doing so again — part of what she called, "a commitment to returning capital to shareholders while maintaining a strong balance sheet."

"When you combine our share repurchases with our dividend payments, we spent $4.2 billion in shareholder-friendly actions in 2014, or 1.3 times our free cash flow from operations for the year," Novakovic said.

Joe Gould contributed to this report.

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