Leonardo DRS (NASDAQ:DRS) is a diversified defense manufacturing business that makes everything from sensors and computer networking equipment to armored vehicles. Though the stock has posted an impressive gain of 21.6 percent over the last 12 months, DRS has sold off by nearly 10 percent over the last week in the wake of its Q3 earnings report. Why did Leonardo DRS stock go down so much, and does the business still look like an attractive long-term holding for investors?
Leonardo’s Post-Earnings Target Cuts
One of the biggest drivers of DRS’s selloff in recent days was a series of price target reductions after its Q3 earnings report was released. Two analysts at Morgan Stanley both reduced their price targets by $2, with the new targets coming in at $45 and $47.
It’s worth noting, however, that DRS is still trading well below the average analyst price forecast after these slight downgrades. The consensus price target at the time of this writing is $48, implying an upside of 31.3 percent from the most recent price of $36.56. DRS also still has seven buy ratings, two holds and no sells, suggesting that most analysts still see substantial value in the business.
What Was in the Q3 Earnings Report?
The Q3 report itself was actually quite positive and the quarter’s revenue of $960 million was up 18 percent over the year-ago quarter. Net earnings rose 26% to $72 million and earnings per share popped 24% to $0.26 per share.
The top line is now expected to total between $3.55 billion and $3.60 billion, up from a prior guidance range of $3.53 billion to $3.60 billion. Though the revisions were small, they do show that management’s expectations for the 2025 fiscal year are more positive coming off of Q3’s strong growth.
Leonardo DRS has even managed to pare back its long-term debts from $340 million at the end of last year to $326 million as of the end of Q3, a good sign of gradual but steady improvements on its balance sheet. With a backlog of $8.9 billion that is up 8 percent from the year-ago period, Leonardo also appears to be positioned for solid future growth as it works through its backlog of orders.
Difference Between Performance V Returns?
Even with some analysts reducing their price targets for DRS shares, it may seem odd that a business posting strong double-digit growth on both its top and bottom lines sold off in the way that Leonardo DRS did. In part, this may be attributed to overly optimistic expectations on investors’ parts.
Thanks to rising defense spending, many of Leonardo’s peers in the sector have surged over the last year. Even with its strong Q3 performance, Leonardo DRS may not have delivered everything investors and analysts were hoping for. With a group of slight downgrades following the report, this disappointment may have caused the selling activity that brought share prices down so drastically.
Another component is likely the fact that the high valuation DRS shares command makes them more susceptible to larger losses whenever the business doesn’t quite meet investor expectations. Even after the selloff, DRS is trading at 37.1 times both its trailing 12-month earnings and operating cash flows. As such, the drop in share prices may be seen as more of an adjustment in valuation than a rethinking of the business’s fundamentals. So far, however, DRS hasn’t started to regain much of the ground it lost after the earnings release.
Is DRS a Buy Now?
Although the stock has been through some downward volatility lately, Leonardo DRS could still be a fairly attractive business. While it makes a wide variety of military hardware, Leonardo stands out as a manufacturer of advanced military technology. With the battlefield becoming increasingly tech-driven, Leonardo could be in for a long period of sustained demand for its electronics and computing systems.
Leonardo is also leading the way in next-generation innovations that could help it maintain its competitive edge. Most prominent among its innovations recently has been the development of counter-drone technology, an extremely important area of development in a military landscape increasingly shaped by unmanned drones. Leonardo recently took the top position in a DoD assessment of counter-drone technologies, likely setting it up for a bright future as the US military invests in effective countermeasures for aerial drones.
Analysts are still expecting considerable earnings growth from Leonardo going forward, a fact that underpins the generally positive outlook on the stock. Through the next 3-5 years, earnings per share are expected to rise at a CAGR of 15 percent. Starting from the trailing 12-month EPS of $0.99, this would suggest earnings of roughly $2 per share in five years’ time. Given that Leonardo’s earnings growth could extend well beyond the 5-year mark, there’s a decent argument to be made that DRS could be a good long-term compounder even at today’s prices.
It’s also worth taking into consideration Leonardo’s potential as a dividend growth stock. Right now, shares of DRS are only yielding about 0.7 percent, well below the sector average. The stock, however, only began paying a dividend earlier this year. With earnings expected to rise at a healthy rate over long periods of time, investors who hold DRS could see substantial dividend growth as management’s ability to return cash to shareholders increases.
All told, Leonardo DRS could still be a decent stock for investors to buy and hold for the long run. With defense spending unlikely to slow anytime soon with today’s increasingly uncertain geopolitical landscape, DRS shares could deliver solid compounding returns over several years. Despite its premium valuation even after the selloff, DRS appears to have attractive growth opportunities ahead of it driven by sustained government investment in advanced military hardware.
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