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NEW YORK (CNN/Money) - Even before all the terms of President Bush's proposed budget were known, Congressional lawmakers were stunned by its austerity. Discretionary spending other than on defense and homeland security is actually slated to decline (after inflation), something that rarely happens in Washington.

On paper, the budget doesn't seem much more generous to military and security spending. But that's a misperception, analysts say. There will be cuts in some of the most ambitious aircraft and naval systems. But spending on ground forces -- both army and marines -- will rise.

Moreover, the military spending in the proposed budget doesn't include supplemental defense appropriations for specific military actions. And to date, well over half the supplemental appropriations for Afghanistan and Iraq have gone to ground forces rather than big-ticket defense systems. In fact, the Bush Administration plans to add combat units to the Marine Corps in fiscal 2006.

I last recommended the defense stocks -- and General Dynamics, in particular -- back in August. The case for the group is that defense spending typically rises in the aftermath of a conflict, because equipment needs to be serviced or replaced. In addition, the military typically discovers in a conflict which systems need to be upgraded.

Since I wrote that column, General Dynamics has risen nearly 10 percent. But the stock still appears reasonably priced. At today's $105 a share, it trades at 15.5 times estimated earnings for the current year.

General Dynamics (Research) is a well run defense contractor that produces traditional military hardware, including tanks and submarines. In fact, in late January the company was awarded a $161 million contract to add enhanced electronics to 129 tanks. This contract is the final stage of an ongoing project to modernize the Army's 3rd Armored Cavalry Regiment.

General Dynamics also provides sophisticated information technology and battlefield communications, accounting for more than one-third of overall revenues. In addition, the company's Gulfstream division produces business jets, a business that is now enjoying an upturn.

Information technology and Gulfstream are also the leading contributors to increases in General Dynamics' backlog. At the end of 2004, the funded backlog was $28.3 billion, up from $25.1 billion at the end of the third quarter.

Earnings are projected to grow at an 11 percent compound annual rate. Combined with the stock's 1.3 percent yield, General Dynamics appears likely to provide a slightly above-average return while trading at a slightly below-market price/earnings ratio.

In addition, since defense stocks follow their own cycle and don't move in lockstep with the overall economy, they typically provide valuable diversification for a portfolio of blue chips or growth stocks.

So far this year, three major brokerages have upgraded General Dynamics or initiated a Buy recommendation on the stock.

Michael Sivy is an editor-at-large for MONEY magazine. Click here to receive Sivy on Stocks via e-mail every Monday.