Innovative Tech And Critical Partnerships Prime For Unprecedented Aerospace & Defense Growth

Key Takeaways

• Leonardo DRS's emphasis on advanced technologies and sectors indicates strong revenue growth opportunities through market share capture in high-demand areas.
  
• The record backlog and strategic expansions, alongside supply chain improvements, solidify the company's potential for sustained growth and operational efficiency.
  
• Challenges including program delays, supply chain issues, and reliance on Q4 performance may impact Leonardo DRS's profitability, revenue growth, and investor confidence.

Catalysts

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

• Strong demand across Leonardo DRS's differentiated portfolio, particularly in advanced infrared sensing, electric power and propulsion, network computing, and ground systems integration, suggests significant revenue growth opportunities as they continue to capture market share within these high-demand areas.
  
• Record backlog exceeding $7.9 billion, up 82% year-over-year, provides visibility into future revenue streams, indicating sustained growth potential as these contracts are realized, positively impacting revenue and earnings.
  
• Supply chain recovery and improvements allow for increased production and delivery efficiency, which contributes to revenue growth and margin expansion by lowering operational costs and improving delivery timelines.
  
• Strategic partnerships for the development of cutting-edge capabilities, such as the integration of edge AI processing into sensors, align with emerging customer requirements and could enhance market competitiveness and revenue growth from new product offerings.
  
• Expansion efforts, such as the facility expansion in Charleston, South Carolina, signify capacity growth to meet increasing demand, potentially impacting both top-line growth and margin improvement by enabling larger-scale production and efficiency gains.

Assumptions

• Analysts are assuming Leonardo DRS's revenue will grow by 7.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.1% today to 7.9% in 3 years time.
• Analysts expect earnings to reach $302.0 million (and earnings per share of $1.11) by about September 2027, up from $188.0 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 32.0x on those 2027 earnings, down from 36.9x today. This future PE is lower than the current PE for the US Aerospace & Defense industry at 32.8x.
• Analysts expect the number of shares outstanding to grow by 0.76% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 5.91%, as per the Simply Wall St company report.

Risks

• The program testing and completion delays on a land integration program within the IMS segment could potentially increase costs and reduce profitability, affecting net margins and earnings.
  
• Although there has been recovery in the supply chain, it's not back to pre-2020 levels, especially in electronic components, which could lead to challenges in meeting production schedules or increased costs, negatively impacting revenue growth and net margins.
  
• The guidance suggests a reliance on improved second-half performance, particularly in Q4, to meet increased revenue and earnings projections. Any shortfall in meeting these projections could impact investor confidence and the company's financial performance.
  
• Specific supply chain improvements have led to increased revenue projections for the year, but with a note on future growth aligning more with previous mid-single-digit projections. This suggests that the rapid growth seen may not be sustainable long term, potentially affecting future revenue and earnings.
  
• The remark about still absorbing higher input pricing in some areas of the business, despite inflation being a lessening factor, indicates ongoing cost pressures that could squeeze net margins if not passed on to customers.

Valuation

• The analysts have a consensus price target of $30.25 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 $33.0, and the most bearish reporting a price target of just $26.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $3.8 billion, earnings will come to $302.0 million, and it would be trading on a PE ratio of 32.0x, assuming you use a discount rate of 5.9%.
• Given the current share price of $26.33, the analyst's price target of $30.25 is 12.9% 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.