Electric Power And Columbia Class Program Will Strengthen Future Position In Aerospace & Defense

Key Takeaways

• Strong contract awards and a robust backlog signal sustained revenue growth and potential margin expansion beyond 2025.
  
• Increased investment in R&D, capital expenditures, and focus on higher-margin areas should enhance innovation and financial performance.
  
• The new administration's fixed-price contracts and defense budget changes could threaten revenue and margins if Leonardo DRS's cost management and key programs aren't effectively managed.

Catalysts

Provides defense electronic products and systems, and military support services worldwide.

• The company secured over $4 billion in contract awards and achieved a 1.3x book-to-bill ratio, which indicates strong demand and points to future revenue growth.
  
• Investments in internal research and development and capital expenditures increased by approximately 25%, positioning the company to enhance future revenue through innovation and facility expansion.
  
• The backlog of $8.5 billion provides visibility for sustained revenue growth and potential margin expansion into 2025 and beyond.
  
• Increased focus on higher-margin areas such as electric power and propulsion, which are central to the Columbia Class program, should support further improvements in EBITDA and net margins.
  
• Plans to commence a $75 million share buyback program could drive significant growth in earnings per share (EPS) and provide shareholder value.

Leonardo DRS Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Leonardo DRS's revenue will grow by 6.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.6% today to 9.7% in 3 years time.
• Analysts expect earnings to reach $380.1 million (and earnings per share of $1.31) by about March 2028, up from $213.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 32.3x on those 2028 earnings, down from 41.3x today. This future PE is greater than the current PE for the US Aerospace & Defense industry at 32.2x.
• Analysts expect the number of shares outstanding to grow by 0.77% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.49%, as per the Simply Wall St company report.

Leonardo DRS Future Earnings Per Share Growth

Risks

• The new administration's shift towards fixed-price contracts could pose a risk if Leonardo DRS's cost management is not as effective as anticipated, potentially impacting net margins.
  
• Material volatility, particularly regarding the supply and pricing of germanium, which is crucial for the sensing business, could increase costs and interfere with projected revenue growth due to production delays or increased expenses.
  
• Changes in defense budget priorities, such as potential cuts in Army expenditures given the current geopolitical and domestic fiscal environment, could adversely affect revenue if key programs are deprioritized.
  
• The reliance on future technological developments, which require increased internal research and capital expenditures, presents a risk if these investments do not yield the desired technological advancements and subsequently impact earnings.
  
• Any potential continuing resolution or delays in defense appropriations could disrupt revenue flow and affect cash management strategies, impacting overall financial stability and earnings predictability.

Valuation

• The analysts have a consensus price target of $37.5 for Leonardo DRS based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $42.0, and the most bearish reporting a price target of just $33.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.9 billion, earnings will come to $380.1 million, and it would be trading on a PE ratio of 32.3x, assuming you use a discount rate of 6.5%.
• Given the current share price of $33.15, the analyst price target of $37.5 is 11.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.