Advancements In AI And Defense Technologies Will Strengthen Future Market Position

Key Takeaways

• Strong demand for differentiated technologies, market expansion, and strategic acquisitions boost Leonardo DRS's competitive position and potential revenue growth.
  
• Advancements in AI and specialized defense technologies are poised to enhance margins and support future earnings growth.
  
• Uncertainty in government budgets, geopolitical tensions, supply chain issues, and reliance on large programs may impact revenue, margins, and earnings.

Catalysts

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

• Leonardo DRS is experiencing strong demand for its differentiated portfolio, evidenced by a 16% increase in quarterly revenue and a book-to-bill ratio of 1.3. This healthy demand for their naval network computing, force protection, and infrared sensing technologies suggests potential for continued revenue growth.
  
• The company's effective expansion into new markets, particularly with its cutting-edge over-the-horizon radar technology and developing its infrared sensing capabilities for smaller tactical drones, indicates potential for future revenue growth and market penetration.
  
• The strategic acquisition and successful integration of RADA two years ago have bolstered DRS's competitive positioning in the rapidly growing air defense space, enhancing both revenue growth and the potential for improving net margins through scale and efficiencies.
  
• The Columbia-class program's progression to later shipsets, which carry more favorable pricing, is contributing to margin expansion and is expected to continue driving higher margins and earnings growth as the production becomes more efficient.
  
• Ongoing advancements in AI-aided target recognition and directed energy solutions for countering drone threats are likely to support future revenue growth and margin expansion by differentiating DRS's product offerings and catering to evolving customer needs in defense.

Leonardo DRS Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Leonardo DRS's revenue will grow by 6.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.2% today to 9.7% in 3 years time.
• Analysts expect earnings to reach $367.7 million (and earnings per share of $1.33) by about January 2028, up from $198.0 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 33.5x on those 2028 earnings, down from 47.8x today. This future PE is lower than the current PE for the US Aerospace & Defense industry at 34.0x.
• Analysts expect the number of shares outstanding to grow by 1.61% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.24%, as per the Simply Wall St company report.

Leonardo DRS Future Earnings Per Share Growth

Risks

• The uncertainty surrounding government appropriations could impact future revenues if Congress fails to pass budgets in a timely manner, affecting funding clarity for defense projects.
  
• Increasing geopolitical tensions could drive temporary spikes in defense spending, but if these tensions diminish, there is a potential risk of downturns or reduced funding, which could impact longer-term revenue growth.
  
• Ongoing supply chain challenges may lead to variability in project execution and timing, potentially affecting revenue recognition and operational margins if not managed effectively.
  
• Dependency on large defense programs like the Columbia-class could expose the company to risk if there are disruptions or delays, potentially impacting earnings and margins significantly given the size and duration of such contracts.
  
• Potential integration challenges or overvaluation concerns in future M&A activities could risk negatively impacting net earnings and the effective return on investments if anticipated synergies are not realized.

Valuation

• The analysts have a consensus price target of $37.12 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 $32.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.8 billion, earnings will come to $367.7 million, and it would be trading on a PE ratio of 33.5x, assuming you use a discount rate of 6.2%.
• Given the current share price of $35.77, the analyst's price target of $37.12 is 3.6% 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.