Downer EDI (ASX:DOW) Valuation in Focus After Multi-Billion Dollar Defence Contract Win

If you have been tracking Downer EDI (ASX:DOW), you have probably noticed the recent buzz following its win of a $3.05 billion contract with the Australian Department of Defence. This is not just another steady project; this deal unlocks a multi-year pipeline of base and estate service revenues and shifts Downer’s exposure further toward government and defense sector business. For investors, contract wins of this scale often bring immediate excitement, but the real question is whether this momentum can deliver lasting value.

The share price wasted no time reacting to the announcement, jumping sharply as markets digested the update. Looking further out, Downer EDI’s stock is up 36% since the start of the year and 35% over the past year, reflecting a steady build-up of positive sentiment and earnings anticipation. This contract arrives on the back of a solid run, with performance accelerating over the past three months and underpinned by double-digit annual growth in net income.

With the shares moving higher and Downer EDI securing a transformation-sized contract, some will ask whether there is still a compelling opportunity here, or if the market has already factored in the full potential of this major defense win.

Most Popular Narrative: 6.5% Overvalued

According to the most widely followed narrative, Downer EDI is considered somewhat overvalued at its current price. Analysts believe the recent re-rating has slightly pushed shares above their fair value when using consensus financial expectations and risk factors.

The company identified four key tailwinds supporting its strategy: transitional energy, government outsourcing, defense capability uplift, and building local industry capability. These align with its strengths in energy and electrical capabilities, defense services, and local manufacturing capability. These factors are expected to drive revenue growth over the coming years.

Curious about what drives analysts to call this stock overvalued? There is a carefully balanced equation at play, with specific growth bets and margin shifts weighing heavily in the forecast. Want to see the precise assumptions that underpin their calculation and why the future profit expectations might not be enough at today’s price? Find out exactly what moves the consensus fair value and what could change the equation next.

Result: Fair Value of $6.82 (OVERVALUED)

Have a read of the narrative in full and understand what's behind the forecasts.

However, risks remain. These include the ongoing business transformation and potential shifts in government policy, which could impact Downer EDI’s revenue and momentum.

Find out about the key risks to this Downer EDI narrative.

Another View: SWS DCF Model Paints a Different Picture

While analysts regard Downer EDI as somewhat overvalued using traditional expectations, our DCF model suggests the shares could be trading far below their true worth. This gap could indicate a hidden long-term opportunity.

Look into how the SWS DCF model arrives at its fair value.

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out Downer EDI for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover undervalued stocks based on their cash flows. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Build Your Own Downer EDI Narrative

If you would rather investigate Downer EDI from your own perspective or believe a different story could emerge, dive into the numbers and craft a narrative in just a few minutes, your way. Do it your way.

A great starting point for your Downer EDI research is our analysis highlighting 3 key rewards and 2 important warning signs that could impact your investment decision.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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