Counter-UAS And AI Investments Will Drive Future Defense Capabilities

Key Takeaways

• Strong customer demand and strategic investments in defense align with DRS's strengths, supporting future revenue growth and improved margins.
  
• Advancements in AI, supply chain resilience, and expansion into ancillary markets indicate potential long-term earnings growth.
  
• Dependence on sole-source suppliers and geopolitical tensions could disrupt supply chains, impacting costs, revenue, and margins amid changing trade environments and defense spending risks.

Catalysts

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

• Leonardo DRS's strong customer demand and a high book-to-bill ratio in Q1 indicate a sustained growth trajectory, which is expected to positively impact future revenue and earnings.
  
• The anticipated continued investments in layered air defense and Counter-UAS technologies, along with shipbuilding and naval platform modernization, align with DRS's core strengths and are likely to support future revenue growth and improved margins.
  
• The company's advancements in AI processors and investments in software capabilities and cooling techniques for shipboard processing requirements are expected to drive revenue from new technology applications and improve future net margins.
  
• DRS's strategic moves to ensure raw material supply chain resilience and align closely with national defense priorities should help mitigate cost pressures and bolster net margins over time.
  
• The expansion of DRS's role in ancillary markets such as next-generation missile systems and unmanned naval platforms signifies potential additional revenue streams, aiding in long-term earnings growth.

Leonardo DRS Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Leonardo DRS's revenue will grow by 6.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.0% today to 8.6% in 3 years time.
• Analysts expect earnings to reach $343.7 million (and earnings per share of $1.3) by about May 2028, up from $234.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 40.5x on those 2028 earnings, down from 47.1x today. This future PE is greater than the current PE for the US Aerospace & Defense industry at 32.4x.
• Analysts expect the number of shares outstanding to grow by 1.1% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.7%, as per the Simply Wall St company report.

Leonardo DRS Future Earnings Per Share Growth

Risks

• The company's dependence on a sole-source supplier for germanium in its infrared sensing products presents a risk of increased costs and supply chain disruptions, potentially impacting future revenue and net margins.
  
• The evolving global trade environment, particularly the ongoing tariff discussions and restrictions on rare earth mineral exports from China, could lead to volatility in pricing and increased costs, affecting earnings.
  
• Despite a strong performance in Q1, concerns about the sustainability of growth and margin expansion due to dynamic macroeconomic conditions could pressure future earnings and net margins.
  
• The focus on improving shipbuilding throughput and reliance on defense budgets with significant investments may expose the company to risks associated with changes in government priorities or spending cuts, potentially impacting future revenues.
  
• Although the company has taken mitigating actions against supply chain impacts, the persistent volatility and unpredictability of material receipts, particularly in the context of geopolitical tensions, may influence financial metrics such as revenue growth and cash flow.

Valuation

• The analysts have a consensus price target of $41.875 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 $49.0, 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 $4.0 billion, earnings will come to $343.7 million, and it would be trading on a PE ratio of 40.5x, assuming you use a discount rate of 6.7%.
  
• Given the current share price of $41.44, the analyst price target of $41.88 is 1.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.